Succession Planning for the Family Cottage

July 15, 2022 | Craig Dale, CPA, CA, CFP, TEP


In the absence of proper planning, the succession of cottages and vacation homes can trigger family disputes or create significant financial headaches and adverse tax consequences.

Welcome back to the blog!

In addition to working with clients on investment and wealth management, I write a blog on tax tips and tidbits and share other articles that I think will be of interest.

In this edition, I’m going to write about succession of the family cottage or vacation home, an asset that is often cherished as a result of the fond memories and traditions that are shared at it over the years.

Now in the discussion that follows, I’m going to focus primarily on the tax implications of succession and make a few simplified assumptions:

  1. The property is located in Canada and owned individually or jointly with a spouse
  2. There is a desire to keep the property in the family
  3. All family members are Canadian residents

In the absence of proper planning, the succession of cottages and vacation homes can trigger family disputes or create significant financial headaches and adverse tax consequences. Therefore, planning for succession is imperative if you want to avoid these potential outcomes.

So what are the options to transfer ownership?

Instead of jumping right into the options, I think it is important to start with a family discussion to assess if all the intended beneficiaries have an interest in continued ownership of the property in the future.

Over time, perhaps one family member has moved out of town making use of the property impractical while another may not have interest given the demands of juggling a career, family or other obligations.

If it is determined that there is a continued interest in the property, then you can start to explore the viable options to eventually transfer ownership, some of which are as follows…

Gift the Property

A seemingly simple option is to transfer the property into joint ownership with the beneficiaries or to consider an outright gift during your lifetime. However, a gift is considered a disposition of the property and triggers accrued capital gains and resulting tax consequences if not designated as a principal residence by the giftor. Further, joint ownership or gifting the property results in some loss of control and can expose the property to claims by the joint or new owner’s creditors as well as to matrimonial claims.

There is more sophisticated planning that might be available where beneficial ownership is retained and only the right of survivorship is transferred. If done correctly, this can mitigate triggering the immediate accrued capital gains and probate at death, however, it is beyond the scope of this blog.

Given the potential complexity and adverse implications here, as a general rule of thumb, I typically approach gifting and joint ownership cautiously as the potential consequences are often not fully understood in advance.

Sell the Property

In contrast to an outright gift, another option to consider is a sale of the property to the beneficiaries at fair market value, which may be significant given the trajectory of real estate prices over the years. If the purchaser(s) are unable to pay for the property, you can consider taking back a private mortgage at the prescribed interest rate. The mortgage can be forgiven in your will or during your lifetime, however, interest payments will have to be made while the mortgage is outstanding.

Now although a sale of the property still triggers the accrued capital gains, it is possible to spread this capital gain out over a 5 year period with appropriate planning. In doing so, the tax consequences of the capital gain may be reduced by having it taxed at a lower average tax rate and by potentially preserving entitlement to income tested government benefits.

Given that the planning around this option can be somewhat sophisticated, it is important to get proper legal and tax advice first to ensure the a sale is structured appropriately to achieve the desired benefits.

Transfer to a Trust

A trust can be an effective wealth planning tool, specifically when dealing with intergeneration succession. In fact, I wrote a whole blog post providing an overview of trusts and outlined some of the strategic benefits that you might wish to refer to first that can be read here.

So let’s walk through some of the types of trusts that can be used and the related tax consequences…

The first option is to transfer the property to a trust while you are still living, which is referred to as an inter-vivos trust. Generally, this type of transfer triggers a deemed disposition at fair market value and any accrued gains are taxable at the time of transfer. Further, every 21 years the trust is considered to have a deemed disposition of the property at fair market value in the absence of any advance planning, at which time any accrued gains are taxable again. In effect, it is possible to trigger capital gains tax twice on a property while you may still be living!

So what are the benefits of using an inter-vivovs trust you might ask?

Well, you get to maintain control of the property during your lifetime, some protection from creditors or matrimonial claims of the beneficiaries can be provided, and probate can be avoided at death. It is also possible to structure a trust with sophisticated provisions to tailor the trust to individual circumstances, so it can be a highly personalized structure.

Okay, so let’s get back to the capital gains taxes that can result from using a trust that I mentioned earlier.

Fortunately, there is an exception to the deemed disposition rule on transferring property to a trust when the transferor is 65 years of age or older at the time of transfer and the property is transferred to an alter ego or joint partner trust. In order to be considered an alter ego or joint partner trust, no one other than you or you and your spouse can be beneficiaries during your lifetime. So although this type of trust is somewhat restrictive, it does alleviate the potential taxes on accrued capital gains at the time of transfer and the application and the 21 year rule in the future. Instead, this type of trust has a deemed disposition of the property at the time of death, similar to if you owned the property personally.

Finally, there is the option to establish a testamentary trust in your will in which case the normal deemed disposition rules apply at the time of death, triggering accrued capital gains and potential taxes as well as the application of probate. This type of trust might be considered as a structure to continue to hold the property for the beneficiaries with additional funds from the estate contributed as well to help fund the maintenance and related costs of the property in the future if desired.

Each individual’s unique circumstances will help to determine if a trust is a viable option to consider, and specifically, what type of trust might be appropriate to achieve the desired objectives.

Transfer by Will

Maybe you’re a procrastinator and didn’t get around to advance planning in your lifetime.                                                

Or perhaps you didn’t want to give up control while still living, prematurely trigger accrued capital gains, or use more sophisticated and complex planning.

In any of these circumstances, the property falls into your estate at the time of death, where one of two things can occur. First, if there are no specific provisions in your will, the property will form part of your general assets, potentially leaving the executor with more discretion than intended on what to do with the property, such as considering a potential sale.

The second and most likely the preferred option is to outline your specific wishes with respect to the property in your will. The will can incorporate options to purchase the property, allowing each beneficiary to decide if they wish to own all or a part of the property. The will can also specify appropriate methods for valuation and payment, including allowing beneficiaries to take ownership as part of their share of the estate. Co-ownership agreements can even be encouraged or mandated to try to minimize family disputes.

So, if you’ve made it this far it is probably evident that there is no one size fits all approach that is best in all scenarios. I therefore will offer a few closing considerations if you are intending to pass on ownership of the family cottage or vacation home…

  1. Start with a discussion with the intended beneficiaries to determine if all have an interest in ownership of the property and assess their ability to pay for expenses, plans for periodic maintenance, and discuss shared usage approaches
  2. Consider a co-ownership agreement for the intended beneficiaries that sets out guidelines on use, dispute resolution options, and funding of ownership costs
  3. Consider the possible use of the principal residence exemption with any option that results in an actual or deemed disposition of the property
  4. Consider the impact of property transfer tax, capital gains, and probate with any option
  5. Most importantly, seek legal and professional advice prior to making any decisions

If you have questions or are interested in exploring planning opportunities, I’d be happy to chat further.

I can be reached at or 604.981.6681.

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