Canada: Succession Planning for the Family Cottage

One of the most difficult assets to deal with in an estate plan is a family cottage. Although you may want to keep the cottage in the family, it is often difficult to develop a plan that is tax-effective and that ensures equitable enjoyment of this asset by those family members who have an interest in maintaining it.

Issues that need to be addressed include:

  • who should inherit the cottage
  • ownership structure (ie, direct co-ownership, some form of trust or nominee corporation)
  • governance issues such as how the cottage will be shared, costs apportioned and decisions made (including decisions about selling the cottage)
  • how to fund the tax liabilities that will arise when ownership is transferred to the next generation

Who Should Inherit the Cottage?

When considering who should inherit the family cottage, it is important to be realistic about who wants it, who will actually use and appreciate it, and whether these family members can get along. In addition, unless you can provide the funds to maintain the cottage in your will, the cottage beneficiaries should have the financial resources to pay for its upkeep.

You may decide that only some of your children should inherit the cottage and that children who are not cottage beneficiaries should receive equalizing payments under your will. Where the other assets in your estate are not sufficient to do this, you may want to consider whether the cottage beneficiaries should be required to pay fair market value for it. This is a good solution provided the cottage beneficiaries have the funds to pay for their interest. Another solution might be to purchase life insurance to provide value to children who are not cottage beneficiaries.

Ownership Structure

There are several options:

  • testamentary trust created in your will
  • inter vivos trust
  • direct ownership through co-tenancy or joint tenancy
  • co-tenancy with title held through a nominee corporation

These ownership structures are described briefly below.

Testamentary Trust

The advantage of a testamentary trust is that a detailed regime for the management of the cottage can be set out in trust provisions in your will. These provisions would include a set of rules for decision making and provide a mechanism for replacing the trustee if necessary. The trust provisions would also specify a termination date when the trust would be wound up and the cottage distributed to the beneficiaries or sold and the proceeds distributed.

The trust structure is ideal where there are several cottage beneficiaries and a fund is created to finance its upkeep because the trustee can make decisions about use and be responsible for maintenance and repair. A trust is also useful where the objective is to preserve the cottage for future generations. This would be accomplished though a prohibition on the sale of the cottage. Some flexibility should be built into the trust terms to permit a sale if ownership becomes cost prohibitive or the beneficiaries no longer wish to use the cottage.

One drawback to the trust structure is the tax rule that deems a trust to dispose of its capital assets every 21 years. If the cottage is held in a trust for longer than 21 years, there must be a plan for funding this tax liability. Alternatively, the trust terms could provide for the cottage to be distributed to the beneficiaries just before the 21st anniversary of the trust. If the beneficiaries are Canadian residents when the cottage is distributed, the distribution will be taxdeferred (ie, the trust won’t recognize the accrued gain and the beneficiaries will inherit the trust’s tax cost of the cottage).

Where the beneficiaries inherit direct ownership, either through a co-tenancy arrangement or as joint owners, there is no deemed disposition every 21 years. The capital gain would be triggered only if the cottage is actually sold or when a co-owner dies.

Inter Vivos Trust

Clients often inquire about whether there are advantages to transferring a cottage to a trust, known as an "inter vivos" trust, for their children and grandchildren during their lifetime. This transfer would be a taxable disposition with the result any accrued capital gain would be subject to tax. In many situations, this would accelerate the tax liability associated with accrued gain and, accordingly, is not an attractive option. Moreover, the 21-year deemed disposition rule described above would also apply. This is a serious drawback if the parents are relatively young and may live for longer than 21 years.

If there are no significant accrued gains on the cottage or the principal residence exemption is available to shelter any gain, and the parents are not expecting to live longer than 21 years, an inter vivos trust may have some advantages. In particular, the cottage will not be part of the parents’ estate and will not be subject to income tax or probate tax when they die. As a result, the tax on capital appreciation that occurs between the date the trust is created and the death of the second parent to die will be deferred until the 21st anniversary of the trust.


Where the beneficiaries can work together harmoniously, a co-ownership arrangement may be the most effective structure. In a co-ownership arrangement, title to the cottage would be held directly by the cottage beneficiaries. Coowners can be either joint tenants or tenant in common. A joint owner’s interest ceases on his or her death and the surviving joint owners inherit the interest proportionately. A tenancy-in-common permits a co-owner to bequeath his or her interest by will and if there is no will, the interest will pass under the intestacy rules. Generally, tenancy-incommon is preferred because it avoids the inequity of the last surviving joint owner having the luxury to pass on full ownership to his or her heirs.

Where a co-ownership structure is chosen, the co-owners should enter into an agreement to deal with issues such as:

  • how occupation will be shared
  • how maintenance costs will be shared
  • rights of first refusal if a co-owner wishes to sell his or her interest
  • what happens when a co-owner dies (e.g. the co-owners children inherit his or her interest or should other coowners have a right to buy his or her interest?)

Nominee Corporation

Co-owners may choose to register title to the cottage in a nominee corporation particularly when there are more than two or three co-owners. It simplifies the transfer of ownership within the owner group because a transfer of registered ownership is not required. In some provinces, land transfer tax is not payable on an unregistered transfer of beneficial ownership. This is not the case in Ontario, however, where land transfer tax is payable on any transfer of beneficial ownership.

Tax Issues

In general, when you die, you will be deemed to have disposed of all of your capital property, including your cottage, for fair market value. Similarly, if you transfer your cottage to your children or to a trust for their benefit you will be deemed to have disposed of it for fair market value. (These rules do not generally apply to property transferred to your spouse). Given recent increases in the value of cottage properties, this accrued capital gain, and the related tax liabilities, may be quite substantial. Funding the tax liability without having to sell the cottage is often a difficult issue.

In some cases, it may be possible to shelter the capital gain on your cottage with your principal residence exemption. A family unit can claim this exemption on only one property, however, and often it is better to claim it on your primary residence leaving the gain on your cottage exposed to tax. If you and your spouse owned your cottage and other residential property before 1982, there may be an opportunity to double up on the principal residence exemption before 1982. Ensuring that title to the two residences is held separately by the spouses is critical to this type of planning. Effective probate tax planning would dictate joint ownership by spouses, therefore an analysis should be made of where the greater tax savings can be achieved.

Where the tax liability cannot be sheltered by the principal residence exemption and there are not enough liquid assets in your estate to fund the tax liability, you may want to consider whether the cottage beneficiaries should be required to fund the tax liability. Alternatively, it may be possible to deal with the tax liability with life insurance.

There is no easy solution to succession planning for the family cottage. The members of our Personal Wealth Management Group bring a wealth of knowledge and experience to the problem and can help you find the answer that works best for your family.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2004 McMillan Binch LLP

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