07 May, 2021 Financial Planning Wealth Management

How to Pass Down the Family Cottage

Muskoka chairs on dock by lake.

Rarely has any asset created more controversy and hard feelings than the well-loved family cottage.


In cases with multiple children, it could be a gathering spot for families, places where children learned how to swim, boat, fish and tell tall tales around campfires. 


But transferring from one generation to the next can be challenging. Often, cottage property is a second home, which you may wish to claim as your principal residence… but not necessarily.

The Three Strategies You Can Take to Keep Your Cottage in Your Family

My family has a family cottage — and we’ve had to consider and discuss our options.


The obvious way to transfer the cottage from one generation to the next is by selling it. This results in capital gains tax, which, with where prices have gone in cottage country, might not be insignificant. The selling party will have to pay the capital gains. Can one child (or two children) afford to purchase it? Do not sell it for $1 or lower than market value. We cover this in another blog post.


The other three strategies you can take:

  1. Setting up a cottage family trust. Have the trust hold the cottage. Upon transfer to the trust, you may have to pay capital gain tax.
  2. Transferring the cottage to a corporation.
  3. Using life insurance to pay for the taxes. Gift the cottage in the will to children: it will leave a significant tax liability with capital gains with the disposition of the property, but fund this with life insurance.

Of course, when all else fails, you can sell the cottage to someone outside of your family. But most of us treat this like a last resort for what’s often seen as a family heirloom.


More details on each of these strategies below.

Strategy #1: Putting the Cottage in a Trust

If you and your partner are over the age of 65, you can put your cottage into a joint trust account. This does not trigger Capital Gains Taxes (CGT). A trust account protects the property from life-altering events and creditors. As joint partners, you can select a trustee (usually a child) who will have executive power over the property.


When you and your spouse die, the CGTs will be triggered, but the trustee can take up to 21 years to decide how it will be paid.  


At the 21 year mark, the trustee can either pay the accrued CGT and interest which will reset the trust for another 21 years or they can take the property out of the trust and distribute it to a pool of beneficiaries. If taken out of the trust, no CGT is owed but the property would lose its asset protection. 


This strategy allows for flexibility and can help your loved ones avoid paying probate taxes on top of additional costs.

Strategy #2: Transfer the Cottage to a Corporation

The chief benefit of this strategy is that you’re liable only for your interest in the cottage itself. 


Putting it in corporation would mean that you would have to pay Capital Gains Taxes at the beginning and you would not be able to use the principal residence exemption.


It requires annual meetings and reports and can be an administrative headache. While it is a strategy used by some Canadians, it’s not the best option for everyone.

Strategy #3: Take out a Mortgage or Life Insurance

If you’re looking to take care of the Capital Gains Taxes right away, taking a mortgage on the home to pay the tax may be a cheaper and less complex option.


Similarly, parents can take out a life insurance policy to cover the tax expense. Costs will depend on the age and health of the parents, but if shared between family members, can be cheaper for everyone.

Some Final Thoughts… 

The above is a quick overview that doesn’t do full justice to the complexity of some of the strategies.

Regardless of what strategy you use, deciding together and having honest conversations about money and your vision for the property is best. 

Once everyone agrees on what to do next, see an advisor to start your planning.