What to do with the family cottage

Understanding your estate and tax planning options.

Lazy days of carefree fun with no schedule, hiking, boating and marshmallows around the campfire are the memories that can stay with you for a lifetime. And whether it’s a simple off-grid shack or something a bit fancier, cottages are special places that bring families together over generations.

But there are some serious questions about the family cottage that require careful consideration. Aside from the fun and relaxing lifestyle, how does the cottage fit with your estate plan? Can you afford to pass it down to a younger family member or do you need or want to sell it? Do your heirs even want it? What are the tax implications involved in transferring the ownership of the property? These questions may seem overwhelming, but learning about what’s involved can help.

Thanks, but no thanks 

Your love for the cottage may run deep, and it can be natural to assume that your children feel the same way. But do they? Why not take a step back and look objectively at what’s involved in keeping your cottage in the family? Maybe it’s time to talk to your children or grandchildren to gauge their desire to accept the responsibility, as well as the costs. Property taxes, utility bills and general upkeep can easily run into thousands of dollars annually. And in this age of property rental apps, renting someone else’s cottage for a few days or weeks at a time, may be more aligned with their comfort level, rather than being on the hook for the maintenance of their own property.

If the desire simply isn’t there, then the next course of action may be to consider selling the cottage when the time is right. The money from the sale can then be added to your overall estate plan – shoring up investments, retirement income, inheritance plans and charitable giving. Meeting with your advisor to sort through the details will help determine if selling is the best choice and what the tax implications might be. 

If you choose to sell

Like most real estate prices in Canada, cottage values have skyrocketed, and your little piece of paradise may be worth much more than what you initially paid for it. It’s important to note that the profit of the sale will be taxed as a capital gain, which can be a substantial amount.

But it’s possible to avoid the capital gain tax if the cottage qualifies for a principal residence exemption (PRE). As a result, tax is not paid on the gain of a principal residence. The application of the PRE is simpler when only one eligible property is owned. However, when two eligible properties are owned concurrently and one is sold, a decision needs to be made regarding the PRE.

In such cases, from a financial point of view, the PRE is often applied to the property with the highest average annual capital gain. This can be calculated by considering the fair market value of each property and the years of ownership. Your advisor can help to explain the calculations that go into determining the PRE.

For details on the calculation for tax purposes see: Principal residence and other real estate - Canada.ca


According to Canada’s Income Tax Act, a cottage can be designated as a principal residence if it meets the following criteria:


  • The property must be a housing unit.
  • You must own the property, either alone or jointly.
  • The property must be ‘ordinarily inhabited’ by you, your spouse or common-law partner or minor children. And the ordinarily inhabited status applies as long as your main reason for owning the property is for your personal use, like a vacation getaway. If the property is mainly a rental that you visit occasionally, then the ‘ordinarily inhabited’ status may not apply.
  • The property must be designated as a principal residence.


More information about principal residence taxation is available here.

Keeping it in the family

Maybe you’ve decided to sell the cottage and not apply the PRE, and your kids want it kept in the family. In this case, the property is sold for FMV, and the capital gains tax will need to be paid. And no, you won’t get a break on the tax bill by selling the cottage for a nominal price. The CRA will still calculate the capital gain based on the FMV. Further, when your kids sell the cottage, their cost base will equal the nominal price, resulting in double taxation.

While selling the cottage today may trigger a taxable capital gain, you can spread the payment out over five years if you take a mortgage back from your kids. If you are feeling generous, you can make the mortgage interest-free and forgive any remaining balance in your will so that your children will own the cottage with no debt payable.

Other considerations

Property and land transfer taxes can be quite high depending on where you live in Canada. This tax is paid for the transfer of ownership regardless of whether a property is sold or gifted to another person.

Holding a cottage in a trust is another option for estate planning, where clear ownership rules can be established, and estate legal fees can be reduced. By moving the family cottage into a trust, the parents can gift the cottage to the children who want to take on the responsibility of ownership. At the death of the parents, probate fees are avoided (where applicable) because property held within a trust is not considered part of the estate. However, in order to preserve tax benefits like using the PRE and transferring the cottage to the trust without triggering a capital gain, it’s critical that the right trust be used. Speak to your advisor to understand the options.

Life insurance can be used to provide funds to the estate to cover the anticipated tax liability on the cottage for the years that the principal residence exemption cannot be used. The appropriate amount can be determined by taking the taxable capital gain and multiplying it by the current owners’ marginal tax rate. For spouses, a joint-last-to-die policy will pay out when the remaining spouse dies. This is when the tax liability would come due, and the spousal rollover would not be available.

Having a cottage can be a wonderful escape from everyday life and a valuable asset.  When it eventually comes time to sell or consider some succession planning, understanding your options, especially as they apply to taxes, can help to ease the stress involved. Your advisor can help you map out a plan that makes sense for your situation.

For more information about estate planning and cottage ownership, you may find this article helpful.