What You—And Your Heirs—Ought to Know About Transferring Your Cottage

Plan on keeping the family cottage for future generations? Learn how a sprinkling trust can help defer the tax burden for your heirs.

Godfrey Yu
Wealth Planner and Relationship Manager 

A cottage can be the perfect place to reunite with your adult children or create memories with the grandkids in the summer, paddling around the lake, roasting marshmallows or enjoying the sounds of nature. Choosing to keep your recreational property within the family can help keep those traditions alive.

According to a Leger survey conducted on behalf of REMAX, as part of its 2023 Cottage Trends Report, 42% of current recreational property owners in Canada are holding onto their properties in hopes of doing just that—passing them down to loved ones.1 The majority (74%) feel confident they will be successful in doing so with the proper planning. But what does that entail, exactly?

Top Considerations for Cottage Owners

The first step is determining who wants the cottage—and whether they can handle the responsibilities and costs that come with it. Like any home, you must pay property taxes, utility bills and regular maintenance expenses. Will all the interested parties be able to cover their share?

This question is important in succession planning, particularly for an inherited property, as the tax bill can be quite high following the owner’s death. Heirs should know of the potential financial obligations, which include:

• Probate fees: This is an estate administration tax calculated on the total value of a deceased person’s estate. This amount varies by province and territory.

• Capital gains: When a recreational property is gifted, the Canada Revenue Agency considers it a sale at fair market value, triggering a capital gains tax—a levy on the increased property value.

  In some cases, capital gains can be in the six figures. The REMAX report found that you can expect to pay around $125,000 in taxable capital gains for a property in the Muskoka area, based on 2023 averages. For Prince Edward County, this number climbs to an astonishing $287,153.1

  Every family will face unique challenges when deciding what is fair. For example, if one child has moved away, will they be using the cottage as often as other family members? What if one beneficiary is not as well off as another? A financial planner can help you decide how to distribute the estate equally and potentially avoid future disputes.

Are There Ways to Minimize These Costs?

Some owners may choose a multi-stage approach to their cottage transfer. This may begin with a joint spousal trust, allowing those over the age of 65 to transfer the recreational property to their significant other, even if it’s not their principal residence, and defer the tax.

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  After the last surviving spouse’s death, the cottage may be transferred to a sprinkling inheritance trust. At which point, your trustees can decide how the property is divided and each person’s share (which, unlike many types of trusts, doesn’t have to be equal). For this option, heirs have 21 years to decide who will inherit ownership before there is a deposition of assets out of the trust and capital gains come due.

  Holding the property in a trust has additional benefits, such as being sheltered from creditors and that it can’t be included in the division of assets in the event of marital breakdown—ensuring your second home stays with the intended recipients.

  Keeping the Family Cottage

  For some, selling their much-loved vacation property is the easiest choice to avoid any conflict. Whereas, for others, the cherished gathering place is worth sharing with future generations. Understanding the tax consequences can minimize the emotional strain, and ensure your heirs can afford to keep your cottage in the family and make informed decisions about their inheritance. We at JCIC are here to answer questions you have about your estate plan and help explore your options.

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