facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
The Family Cottage - Dealing with Succession  Thumbnail

The Family Cottage - Dealing with Succession

Canadian cottage owners have memories of happy childhood experiences associated with cottage life in the summer. Many who now are fortunate enough to own their cottages are anxious to leave the vacation property to succeeding generations, for the continued enjoyment of children and grandchildren.

Over the next few blogs, I will explore some of the issues of cottage succession planning, some pitfalls to avoid and some strategies for keeping the taxman at bay.

There are many things to consider in any succession plan; however the most serious financial obstacle to passing the cottage on to your children can be the Capital Gains Tax liability.

At one time there was no such thing as Capital Gains Tax in Canada. It was imposed in 1972 and the basic exemptions, through changes to the Income Tax Act, were first reduced in 1992 and eliminated in 1995. Today, despite a decrease in the inclusion rate, Capital Gain represents the single most onerous financial burden of most succession planning strategies.

There are a number of things to consider when looking at what to do with the family cottage:

  • Which family member(s) would be most interested in keeping the cottage?
  • When is the most appropriate time to pass the cottage to them?
  • Is it possible to maintain control and still be assured that the cottage is being transferred according to my wishes?
  • What are the financial or tax implications?
  • Capital Gains Tax, Land Transfer Tax, Probate Fees
  • Dealing with capital gains at death

When you die, assets such as the cottage can be transferred to your spouse tax-free, but a transfer to your children may trigger a capital gain which must be paid at the time of transfer.

Over the years, cottages have generally had large increases in value. At death, 50% of that increase becomes taxable and could trigger a significant capital gains liability to your estate. If your estate does not have sufficient assets to pay the tax, the estate could be forced to sell the cottage, meaning it would not stay in the family.

What if I gift the cottage now?

Gifting the cottage to the children now will result in a deemed disposition, meaning it will be as if it were sold at fair market value and any capital gains must be reported in the current year. You will need to be sure you have funds available for any capital gains tax payable. You may have some capital losses from the past, or be able to realize a current loss to help offset the gain.

You might consider transferring it in stages, rather than all at once. By transferring a certain percentage each year, the taxes will apply to each portion, and will be spread out over the transfer years. This can help reduce the risk of having your OAS benefit clawed back, which applies when you have income over about $75,000.

Update cookies preferences