Passing along the family cottage

A sprightly pas de deux with the tax man can be launched when a parent prepares to turn over a summer home to a child. There are ways of keeping government temporarily at bay.

Darryl Prociuk Your Business
Darryl Prociuk
Your Business

A source of many happy and lasting memories, family cottages are often passed down from one generation to the next. A successful transition, however, depends in large part on how important tax and legal issues are addressed.

When interest in a cottage is transferred to anyone other than a spouse, capital gains – calculated as the current market value less its adjusted cost base – are triggered. As 50 per cent of the capital gain is included in the taxable income of the transferring parent, along with the potential for the clawback of government benefits such as Old Age Security, concerns over the tax bill often result in a delay in the transfer of the cottage until both parents have passed away. Depending on how much the property has appreciated in value, the taxes payable may be considerable and could even result in its sale.

Tally your improvement costs

A number of planning strategies may be employed to reduce or defer the tax liability on the cottage. One simple strategy is to document all capital improvements that have been made, such as replacing the roof or installing a new well. These improvements increase the adjusted cost base thereby reducing the total capital gains. (It is worthwhile, too, to check to see if the cost base had been bumped up, using all or part of the general $100,000 capital gains exemption prior to its repeal in March 1994.)

Designating the family cottage as your “principal residence” lets you avoid all capital gains upon its sale or disposition. However, doing so will normally rule out use of this exemption for other properties owned by either spouse. It is important to note that special rules apply to cottages owned prior to 1982.

Adding an adult child as a joint owner of the cottage is a technique often used as a means to bypass probate and delay the eventual tax bill. When ownership passes to the adult child by right of survivorship upon the death of the last surviving parent, disagreements between siblings may arise. While the sibling who received the cottage may believe it was the intent of the parent to gift him or her the cottage, the other siblings may believe a gift was not intended and that the cottage was made joint only for estate planning purposes.

Selling the cottage now to the children at its fair market value will immediately trigger a capital gains tax. However, by taking back promissory notes instead of cash, it is possible to spread the tax bill over five years.

To maintain harmony among a new generation of owners, a written cottage agreement is recommended. This agreement should include a schedule for the use of the cottage, clarification as to who can be an owner, and the financial contributions required from each owner to ensure the cottage is properly maintained and bills are paid. Provisions as to how financial decisions are to be made and disputes are to be resolved should also be set out in the agreement.

Sell if you can’t share

If joint ownership among siblings is not workable, establishment of a trust with the siblings as beneficiaries may be a more suitable alternative.

As a last resort, the cottage could be sold with the (after tax) proceeds distributed to the children.

With professional advice and advance planning, the necessary tax and estate planning issues can be resolved and the family cottage preserved so that future generations can continue to create happy family memories of their lakeside vacations.

Darryl Prociuk is a registered financial planner. He can be contacted at

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