As you lounge on your dock this summer it might be a good idea to give some thought about the future fate of your cottage hideaway. While cottage life is fabulous, it does come with some potential issues that could cause heartache down the road for you or your family if you don’t address them now.

Your Family Trust Might Need Some Tweaking

If you own a home or cottage through a trust you should speak to a Chartered Professional Accountant to ensure that your family trust structure meets the requirement of the recent CRA tax law amendments. You might find that you need to make some changes to ensure that your estate planning is still appropriate. Here’s an example: if your trust is no longer eligible to designate a property as a principal residence under the new rules, but owned that property at the end of 2016, then it must separate its gain into two components:
1) The gain accrued to 31 December 2016 (which may be sheltered by the principal residence exemption)
2) The gain accruing from the beginning of 2017 to the date of disposition (this portion will be subject to tax).

Do You Plan to Live at Your Cottage Full-time When You Retire?

If your plan is to sell your home and eventually use your cottage as your principal residence, it’s a good idea to sketch out that plan to forecast the tax implications of various scenarios.  If you were to sell your principal residence and then move to your cottage to live, you do not have to pay capital gains tax on the sale of your house, but you would need to report the sale because CRA (the Canadian Revenue Agency) now requires the reporting of your sale on your income tax return for tracking purposes.

Once you move to your cottage it would become your principal residence. However, if you chose to sell your cottage at some future date you will trigger a capital gain tax bill because it has not been your principal residence for the entire time you have owned that property.  In order to calculate the tax you owe, CRA would use the following calculation:

(# of years home is principal residence + 1)  x capital gain
# of years home is owned

Do you plan to pass down the cottage to your kids?

If your wish is to pass along your cottage to your children, then you will need to give careful thought regarding how you intend to do this and what implications it may have for your children. You can pass down the cottage as a part of your estate:

Scenario One: You have been living full time in your cottage at the time of your death. In this scenario, the capital gains tax owed by your estate will be calculated as though you sold the property (see calculation above).

Scenario Two:  You have NOT been living full time in your cottage at the time of your death.  The tax triggers for each property will be based on their status as property: principal residence (home) and personal-use property (cottage). Both properties will be treated as though they were sold and the tax owing will be determined thusly:

  • Your Principal Residence –  exempt from capital gains tax
  • Your Cottage –  your estate will be required to calculate the increase in the value of the cottage from the purchase date to the date of death. If the cottage has been owned since before 1972, only the increase in value since December 31, 1971 is taxable, because taxation of capital gains began with the 1972 taxation year.  December 31, 1971 is the valuation day for properties owned prior to that date.
If you are worried that your estate may not have the funds to pay this tax bill and your kids might be forced to sell the cottage because of it, you might want to think about getting a life insurance policy that can be used to pay the tax bill when the time comes.
 Note: Remember life insurance premiums gets more expensive as you get older, so don’t wait too long to buy or you’ll be paying more!  You can think of creative ways to pay the premiums like sharing the cost with your kids or having them pay it entirely.  Just be sure to discuss this with everyone before buying anything, to ensure that each person agrees with this plan.

Sell The Cottage to Your Kids at a Bargain Price

Some people favour selling their cottage to their kids for a small amount to avoid capital gains tax. The reality is that it doesn’t matter if you sold it to them at a bargain price, CRA will still calculate the capital gain based on the fair market value of the property to determine the tax bill. And just to add to the fun, CRA will use that low purchase price as the calculation for capital gains if they should ever sell the cottage. Ouch!  So basically, there is no getting around it, someone will have to pay the taxes one way or another.
Aside from tax implications there are other scenarios that you might want to chat about with your kids to make sure everyone is happy with the unique dynamics that result from a shared family cottage:
  • How will the taxes, running and maintenance costs be shared/paid for?
  • How will the usage time at the cottage work?
  • What if one of your children decides he/she wants to sell their portion? Or is forced to because of a divorce scenario?

Cottages are wonderful places for families to gather, share experiences and make memories, so it’s important to take some time to plan for a smooth transition into the future. There is a method that can accommodate the unique structure of your family.

As a shared family cottage owner myself, and Chartered Professional Accountant, I can understand the situation from both sides.  If you would like to chat about your cottage or estate planning issues, and determine the best tax planning structures  for you and your family,  please call to arrange a consultation time. 

The KMPC team specializes in helping companies grow via strategic financial management practices. Since 1993, KMPC has been helping businesses in Whitby, Oshawa, Ajax, Durham Region and the Greater Toronto Area (GTA) to reach and surpass their profit goals.

If you would like to speak to us regarding  Business Accounting, financial  retirement or tax planning, tax returns, bookkeeping or any of your other  please contact us anytime – we’d love to chat with you.

KMPC– Chartered Professional Accountant, CPA 11 Stanley Ct, #13 Whitby, ON L1N 8P9 – Local: (905) 666-5071 – Email:  Web: