Heading to the family cottage is a summer tradition for many Canadians. In some cases, cottage ownership has spanned generations. When it comes time to plan the future for your property, while alive or through your will, there are a number of issues to consider. If you have not yet formulated a plan for how to transfer your cottage to the next generation, we’re here to help provide you with some insight and some conversation starters as you prepare to get together with your family this summer. We hope this article is a helpful tool for considering the best option for your family.

Death, Taxes and the Family Cottage

When a cottage is owned by one individual, on their death, the cottage will be dealt with through the title holder’s estate. On the date of death, the cottage will be deemed to have been sold.  Given the dramatic increase in cottage values, there can be significant tax implications.  Income tax is payable on the increase in the value of the property.  The tax will be calculated as follows:

            Capital gain = Value minus the cost of the property 

            Cost can include the cost of improvement to the property e.g. new boathouse, addition etc.

            50% of the capital gain is taxable (tax is 26.77% of the gain)

If the property is gifted to a family member or sold for less than its value, it is deemed to have been sold for its fair market value and the tax consequences will be as if you sold it for its current value.

Principal Residence Exemption

The gain on the sale or disposition of a principal residence is exempt from income tax.  The cottage may qualify wholly or partially as the principal residence however you can only claim one property as the principal residence for the same years of ownership.  You cannot claim the exemption for both your city house and the cottage for the same years of ownership.

Estate Administration Tax

Estate Administration Tax also known as “EAT” is payable when “probating” your will.  For estates over $50,000, EAT is 1.5% of the value of the estate.  Probate tax can be avoided if the property is owned jointly with right of survivorship.  Typically, this is recommended for spouses but not with children and we will discuss in the section below.  

Assuming that the cottage cannot be considered the principal residence there are a number of options that we can consider in order to protect this precious asset from the potential tax hit:

A. Joint Ownership

There are two main classes of co-ownership.  Joint tenancy where assets would pass outside of the estate and tenancy in common where the entitlement belonging to a deceased owner will flow through the deceased’s estate and be subject to a deemed disposition and included in the estate’s probate calculation. The deceased’s ownership portion of the cottage will be distributed from the estate as stipulated in the deceased’s will.  When entering into a joint ownership agreement with children the intention should be documented – true ownership versus ownership for convenience/probate planning.  Joint tenancy will help avoid probate tax but will not help in getting around creating a capital gains tax liability.  There is a disposition for tax purposes at the time the children become joint owners and on the death of the parents, income tax is payable by the estate even though the cottage is inherited directly by the joint owners.  In addition, the parents would lose full control of the property during their lifetime. If there was a marriage breakdown with any of the joint owners, the property could be subject to division of assets.

B. Use of a Corporation 

It is generally not advisable to hold a personal residence inside a corporation.  The main reason is that under the Income Tax Act, the value of the rent-free use of the corporation’s residence by the shareholder is considered to be a taxable shareholder benefit and must be included in the owner’s personal income.  The value of the benefit will generally be equal to a market rate of return multiplied by the fair market value of cottage, less amounts paid for the use of the property.

The other problem with a corporation holding the property is the inability to the principal residence exemption on the sale, gift or transfer of the property or the shares of the corporation. 

C. Family Trust

The use of inter-vivos trusts (trusts that are set up during one’s lifetime) can also be considered.  A family trust will not have to file tax returns if there is no trust income.  Rules for shared use and methods for splitting expenses can all be set up in the trust document.

Transferring a property into a family trust will be considered a deemed disposition and will trigger capital gains taxes, which can make this option impractical if the gains are substantial. Once the cottage is transferred to the trust, it will be subject to the 21-year disposition rule, forcing the trust to pay tax on the accrued gains every 21 years if the asset is not sold during that time, which can also result in a significant tax bill.  On top of this there will be legal fees for setting up the trust.

If a person were age 65 or over, the cottage could be rolled into an “alter ego trust”. This would allow them to continue controlling the asset, deferring the capital gain until death and finally avoiding the probate tax on the cottage as well. 

D. Transferring Ownership through “Selling” to a Beneficiary While Living

Parents can consider selling the cottage to their children while still alive. This option will also avoid probate tax.  While you will still have to pay the capital gains taxes, if properly planned you may be able to spread the capital gains over five tax years, thereby reducing or deferring the impact.  If desired, the parents can forgive the mortgage in their wills, thereby leaving the cottage to the children with no debt or additional taxes payable.  

E. Life Insurance 

Life insurance can be used as a solution to fund the tax bill. A permanent joint last-to-die policy with an increasing face value to match the rise in the value of the cottage in the future would be the most appropriate choice in this case. On the death of the last, the policy would pay most if not all of the tax bill. By naming the children as beneficiaries of the policy, the proceeds would pass outside the estate and probate taxes can be avoided. 

If this method is chosen, care has to be taken to accurately assess the fair market value and future growth rate of the property to ensure that enough money will be available to pay the final tax bill. Insurability of the owners can cause a problem too and their age and health may make the policy prohibitively expensive. 


There are many options for keeping a cottage in the family for future generations to enjoy. While not always easy, considering both the emotional and financial aspects of transferring or gifting a cottage to your children or family members will go a long way to ensuring a smooth transition.  The best solution depends on each family’s unique situation, needs and requirements.