Estate Planning and the Family Cottage

October 28th, 2015 by Alleen Sakarian

Planning for the family cottage can be challenging. Often there is a strong sentimental value attached to the property and a desire to preserve it for generations to come.

Some important considerations include:

Capital Gains

Capital gains taxes are realized on any disposition. A disposition includes transferring the property to anyone who is not a spouse (i.e. children, a trust). There is also a “deemed” disposition on death. It is important to plan when this gain is realized in order to have control over when the taxes are paid.

Where the intention is to keep the cottage in the family, some thought needs to be given to the tax burden to the intended beneficiaries i.e. will they need to sell the property in order to satisfy the tax burden. One option is to fund the anticipated tax with life insurance.


The cottage can be gifted as an inter vivos gift (during the lifetime of the donor) or as a testamentary gift (through a will).

Inter vivos gifting can be accomplished by transferring title to the property into the name of the intended beneficiary or by settling the property into a Trust. Either option would result in a disposition and trigger capital gains tax. Ownership of the property is transferred and the cost base to the beneficiary remains the same as it was for the donor. This may result in double taxation on the disposition of the asset.

With a testamentary gift, the cottage is left to the intended beneficiary on death. The date of disposition is the date of death. There are important points to consider when leaving testamentary gifts in a will. Of note, is the Family Law Act exclusion which states that any gift left to a beneficiary is intended for the named beneficiary and is not intended to form part of the community of property (marital property). Accordingly, if one of the beneficiaries experiences marital breakdown or divorce, the cottage does not form part of assets for equalization purposes and the interests of any remaining beneficiaries will not be jeopardized.

Furthermore, a testamentary gift will “bump up” the adjusted cost base of the cottage and avoid the potential for double taxation referred to above. The full capital gain is realized on the death of the donor and the beneficiary assumes the gift at fair market value.

Principal Residence Exemption

Finally, it may be useful to consider designating the cottage as a principal residence for income tax purposes and, thereby, shelter some of the gain arising on the disposition of the cottage. Only one property can qualify as a principal residence. You will need to compare the capital gain on the respective properties to determine whether the exemption should be claimed on the Cottage property or saved for the sale of another property.
Ultimately, the various methods should be investigated and a cost-benefit analysis undertaken to determine which method fits best with the family dynamic and the long-term objectives with respect to the family cottage.

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