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Kevin-Barry Henry

What Happens To The Family Cottage When We Die?

By: Kevin-Barry Henry, Ask me Anything

In Canada, there are two things to look out for when it comes to transferring a cottage or vacation property to the next generation. The first is capital gains tax and the second is probate.

Those of you who have read my first book “Don’t Die Until You Do It!” will know that my mother and father built a cottage for our family in the late 1970s when we were children. It was – and continues to be – a magical place where we ran and played and chased butterflies and grasshoppers, caught frogs, roasted marshmallows on the fire and so many other wonderful activities. We don’t catch frogs or chase butterflies anymore, but my parent’s grandchildren do and that is truly special. Needless to say, our cottage holds a very special place in our hearts. For our Dad, it is still the place he loves the most, and feels closest to Mom. Although he can no longer spend the night, we still are able to bring him up to the cottage several days each spring, summer, and fall. He loves it and so do we.

As it is with our family, you may also have a family cottage that you either bought or built many years ago, or it may have been in your family for generations and may have an almost sacrosanct to the family. I understand completely.

It may also be a newer vacation home that has only recently come into the family, and it may not have been used by the entire family. In that case, emotional ties may be fewer, but the cottage is still a very important asset when it comes time to figure out how to transfer the ownership onto the next generation while writing the smallest possible cheque to the government for the privilege of keeping the cottage that you own in your family. You will need to know how much it will cost to transition your cottage to the next generation and then we can look at strategies to minimize and cover the cost. That is what we will tackle in this article.

The first thing you will want to do is find out if your child or children want to keep the cottage in the family and are able to keep up with the associated costs for upkeep and maintenance when you are no longer paying the tab. The answer might surprise you. It is also possible that some children (or beneficiaries) will be more attached to the property than others. It will be important to know and understand this dynamic when you decide to put your plan in place to transition your property to the next generation.

Some family members (or beneficiaries) may prefer not to inherit any part of the property. That is useful information when it comes to making a succession plan. If that is the case and you can still include them in your legacy, but perhaps through another asset or of course, there is always cash. In any case, in addition to the maintenance, upkeep and yearly property taxes for your cottage, there will likely be a capital gain that will need to be paid, and that is what we are looking at today. How you construct your estate plan is covered elsewhere on this site.

Speaking of maintenance and upkeep, it is possible that while a beneficiary may wish to own the property, they may be unable to afford to maintain it, particularly if the structure, septic system, or docks are aging. You will also need to consider that as property values in certain areas have risen sharply in many areas this year, the property taxes will be rising with them. Although it may be well-intentioned, lack of proper planning by leaving the family cottage to a child or beneficiary that cannot afford their share of the costs will cause a host of future problems, and often can cause family disputes. I have read many, many terrible and sad stories of families who end up in front of a judge because of the cottage. These families all got along until it came time to settle the estate and the cottage ripped the family apart. The parents were well-intentioned but through either poor planning, making assumptions to simply neglecting to plan, the cottage became the reason they no longer speak.

You can make sure that doesn’t happen to your family by putting the plan in place now.

Once you know how you plan to divide the shares of your vacation property for your beneficiaries, you could start by figuring out how upkeep responsibilities should be divided. Otherwise, family members with less ability to pay the expenses could expect the members with greater resources to pay more, and that never ends well. Beneficiaries who use the cottage less often, or who are not as handy may also expect to do less work, despite equal ownership interests.

Lastly, it is also a good idea to have a schedule in mind for beneficiaries to be able to enjoy the cottage equally, especially regarding in-laws, which is also a common source of friction. You can address that as part of the plan, so the rules are clear.

Capital Gains and Probate

You have probably noticed that since the beginning of the pandemic, costs of goods have been going up. You may have also noticed that the value of your home has happily gone with it, which is great news for homeowners. Cottages and vacation properties have also been swept up in the trend of increased value and that means that those who own cottages and vacation properties might have a good problem. A capital gain. In some cases, a hefty capital gain.

This means that at some point, taxes will have to be paid on that gain. In Canada, there are two things to look out for when it comes to transferring a cottage or vacation property to the next generation. The first is capital gains tax and the second is probate.

Probate, which is sometimes referred to as the death tax happens when you die. The second you die, all your assets are deemed to have been sold at fair market value on that day. In Ontario, where probate is one of the highest rates of all the provinces, that amounts to 1.5%. Each province is different. That can add up quickly in this real estate climate and means that for a $1 million property probate tax will be $15,000. That is in addition to the probate that will be owed on all your other assets. Just be aware that if you have a cottage or vacation property, probate is something your estate will have to consider, especially if you don’t consider it now.

We have covered the principal residence in a few articles in this space already, but for the purpose of this article, let’s assume the principal residence exemption is in place for your home and there is no tax bill on the gain.

Your cottage, however, is a different kettle of fish altogether. Let’s assume you bought or built a cottage in the 80s for $40,000. Today let’s say the cottage has appreciated to $440,000. You have earned a gain of $400,000. Congratulations! Not bad at all…

If you divest of your cottage by selling it, or if you happen to die without addressing the capital gain, here’s what happens: Your gain of $400,000 is fully subject to capital gains tax and the full $440,000 is subject to probate. Although there have been rumblings recently about an increased inclusion rate to capital gains, right now it is 50% so we will work with that. The first 50% of your gain is yours to keep, tax-free. So, 50% of $400,000 is $200,000 and that is yours to keep tax-free. The second 50% will be what the government has its eye on, and on that half, you will owe capital gains tax at your income tax rate in the year you realized the gain. Depending on your tax-bracket, a $400,000 can lead to capital gains tax nearing $100,000.

So, your children or beneficiaries could have to pay almost $100,000 to keep the cottage that you own in the family. I hope I have your attention now.

Just Take Care Of It…

That is why it is so important to plan and so important to talk with your family and beneficiaries. You might be surprised. If they no longer want the cottage and would prefer the cash, then your decisions and plans can move in that direction. If they instead decide to keep the property, then you will have to be aware, and make them aware, that at some point, there will be a bill to pay and plan accordingly.

There are a few strategies in place to manage the capital gain, and you should know about all of them to make an informed decision. There are family trusts, gifts, estate freezes and others and we haven’t even looked at the family law considerations regarding in-laws and marriages, which you should.

One of the simplest ways to take care of the gain is by getting a life insurance policy that will cover the tax bill on the capital gain. It is literally exchanging pennies for dollars. You can even do it from home now, and no nurses will visit you. It has never been easier. There are several strategies in place to help you and I can help you look at all of them.

If you think life insurance is too expensive or that you won’t qualify, remember that the $100,000 bill from our example is coming. Your bill may be more or may be less, but it will come. Life insurance to protect your estate may the cheapest thing you can do. Covid has changed much in our world and life insurance is no different. It has never been easier.

You can reach out to me for a free 15-minute call or zoom to find out more or just ask a few questions.

Every situation is different, and you must work with your family and talk to an advisor to find out what works best for you. The one thing I would encourage you to do however is talk to your family. The path will become clear when you do.

With Gratitude,


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