It's Your Money  

Passing the family cottage

The family cottage can be the most coveted, yet challenging part of many people’s estate plans.

Many family members will have countless memories at the cottage built up over many years, if not decades, and can’t imagine the idea of losing it when the primary owner passes away.

At the same time, the tax consequences of passing the cottage on at the time of death can be substantial. And if these taxes are not properly planned for, the surviving family members may not have a choice.

While each situation is different and a proper estate plan should be tailored accordingly, here are a few of the key items to consider:

Tax liability

Many people do not realize that the increase in value of their vacation property from the time of purchase may be taxable to their estate when they pass. At the time of death, there is a “deemed disposition” of all of a person’s assets, unless they are transferred to their spouse or common-law partner.

A deemed disposition means that your assets are deemed to be sold for fair market value. So, if you purchased the family cottage 25 years ago for $150,000 and its fair market value today is $750,000, your death would trigger a $600,000 capital gain.

Principal residence exemption

One possible way to reduce or eliminate the tax liability on your cottage is to designate it as your principal residence for tax purposes.

If you do this for the entire time you own the cottage, the increase in value would not be taxable.

There is a catch however — you can only claim this on one property, so if you do this for your cottage, it means the gains on your primary home would end up being taxable.

And before you ask, no you can’t claim your cottage and have your spouse claim your other house in the same year(s).

Adjusting the cost base

Another way to reduce the tax bill owing is to adjust the cost base (purchase price) with any additional money you put into the property.

While you cannot claim “sweat equity” for work you perform, you can increase the cost base by any out-of-pocket expenditures.

You would want to make sure this was money actually put into the improvement of the property and be sure to keep all receipts!

Planning for the taxes

There are a number of ways to prepare for this tax bill so that you can ensure the property won’t need to be sold upon your death to cover them. Some estates will have sufficient cash flow to do so and others may plan to cover the bill with an insurance policy.

In some cases, the children who will inherit the cottage choose to pay for the insurance premiums to ensure they are able to keep it.

Confirming the interest

Often, one or more of your children may not be as interested in carrying on with the property as their siblings. This is important to discover early, so that you can build this into your estate plan.

You can easily accommodate this by “equalizing the estate” if you plan for it. For example, one child may receive the cottage and the other is the sole beneficiary of an insurance policy worth a similar amount.

Giving while you are alive

One mistake that some property owners make is to try to escape paying tax by transferring the property to their children while they’re still alive.

This strategy contains many pitfalls and needs to be approached carefully. Not only will this “gift” trigger a disposition and taxes owing at the time, it also opens the property up to your child’s partners and creditors too.

Planning for multiple owners

If the cottage is currently owned by you and your spouse and the plan is to leave it to multiple children (with spouses of their own), you need to consider a co-ownership agreement. Something that stipulates how the property will be used, who will pay for it, how time is divided and how it will be kept.

The very last thing you would want to see is the gift you leave behind driving a wedge between family members.


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About the Author

Brett, designated as a chartered investment manager and certified financial planner, is the regional director (Okanagan) for IG Wealth Management.

In addition to his “day job," Brett was appointed to the board of directors of FP Canada (formerly FPSC) in 2014, named as the board’s vice-chair in 2017 and took over as board chairman in 2019. 

Brett has been writing a weekly financial planning column since 2012 and provides his readers with easy to understand explanations of the complex financial challenges that they face in every stage of life.

Enhancing the financial literacy of Canadian consumers is a top priority of Brett’s and his ongoing efforts as a finance writer and on the regulatory side through the FP Canada board focus on this initiative.   

Please let Brett know if you have any topics that you’d like him to cover in future columns by emailing him at [email protected]

The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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