Pour yourself a coffee. This is an important 10 minute read for families who own a camp or cottage.

It is July, which means many of you are spending your weekends by the lake, enjoying time at the family “camp,” as we call it here in Northern Ontario, or the “cottage,” for our friends farther south. It occurred to me that, while everyone is gathered together this summer, it may be the perfect time to start an important family conversation, if you haven’t already.
For many families, this property is much more than real estate. It is where summers are spent, traditions are created and generations come together. Understandably, many parents dream of keeping it in the family and passing it on to their children and, in many cases, their children share that dream.

However, the family cottage is also easily one of the most complicated assets we discuss in estate planning meetings. While families are enjoying these treasured properties this summer, it is worth considering what it truly means to leave the camp or cottage to the next generation.

Parents often picture their children and grandchildren continuing to enjoy the property together. What they may not picture is the capital gains tax, ongoing costs, disagreements between siblings or the practical question of whether their children actually want, or can even afford, to keep it.

Yes, the cottage can absolutely be a wonderful legacy. But without proper planning and honest family conversations, it can also quickly become an unexpected financial and emotional burden.

The question is not simply, “Who should inherit the cottage?”

It is also, “Will they want it, can they afford it, and have we prepared them to own it together?”

What Could the Tax Bill Look Like?

Let’s start by understanding how tax can apply to a family camp or cottage. For many families, it is a second property rather than the home they live in year round. Although a cottage may qualify for some or all of the principal residence exemption in certain circumstances, it can still have a significant taxable gain when it is sold or transferred to the next generation.

Consider a camp purchased 50 years ago for $50,000 that is now worth close to $1 million. That increase in value can create a substantial capital gain and a potentially significant tax bill.

Over the years, the owners may have invested another $200,000 in major improvements. Eligible capital improvements can generally be added to the property’s adjusted cost base, reducing the eventual capital gain. However, those expenses need to be reasonably supported.

The challenge is that many families no longer have receipts for renovations completed 20, 30 or 40 years ago.

Old bank statements, cancelled cheques, contractor records, permits, appraisals and photographs may help an accountant piece together some of the eligible costs. Pictures can show that a significant improvement was made, but they do not prove exactly how much was spent. This is why it is so important to begin gathering and organizing your records now rather than leaving that job to your executors.

We have seen this firsthand with many clients, and it can be incredibly stressful. Every eligible expense you cannot support may mean paying more capital gains tax than necessary.

The goal is to reduce the gap between what you paid for the camp and what it is worth today by properly accounting for the improvements you made along the way. If you spent money improving the property and those improvements helped increase its value, you do not want to effectively pay for them twice: once when the work was completed and again through a larger capital gain.

It is also important to distinguish an improvement from regular maintenance. Adding a bedroom, rebuilding the cottage or installing a new septic system may increase the adjusted cost base. Painting, routine repairs and general upkeep usually do not.

In our example, even if the full $200,000 of improvements could be supported, the property may still have an approximate accrued gain of $750,000 before considering selling costs, any available principal residence exemption and other tax circumstances.

This does not mean $750,000 in tax will be owing. The $750,000 is simply the increase in the property’s value. The actual tax bill would be calculated on a portion of that amount and will depend on the owners’ personal circumstances and the tax rules in place at the time.
“Okay, So What if I Transfer It to the Children Now?”

We often hear:

“I’m 80 years old. Why don’t I put the cottage in my children’s names now and avoid probate?

Unfortunately, you cannot outsmart the CRA. They have thought of this too. Yes, you can give the cottage to your children while you are alive, and because you no longer own it, it would avoid probate through your estate. But CRA still wants its “pound of flesh.”

Even if you give the cottage away and no money changes hands, CRA treats the transfer as though you sold it for its fair market value. In other words, you can give your children the cottage for nothing, but for tax purposes, CRA considers it sold at what it was worth that day. This will trigger the capital gain and the related tax during your lifetime.

The immediate question then becomes: where will the money come from to pay the tax?

This is especially important for retirees. You may own a very valuable cottage but have limited cash available. Paying the tax now could require a large withdrawal from your investments, which may create even more taxable income, affect your OAS benefits and reduce the security of your retirement plan.
Many people view avoiding probate as the ultimate goal of estate planning, but saving probate tax should never be considered on its own. In some cases, removing an asset from your estate simply to avoid probate can create much larger income tax, legal or family issues than the probate tax you were trying to save.

Today, in Ontario, Estate Administration Tax, commonly called probate tax, is $15 for every $1,000 of estate value above $50,000. Any potential probate savings must be weighed against the capital gains tax, legal consequences and loss of control that may come with transferring the cottage during your lifetime. Sometimes, allowing an asset to pass through your Will and paying the probate tax is the simpler and less costly choice overall.

A strategy that saves one cost could create a much larger or more immediate problem elsewhere.
Your Estate May Be Better Positioned to Pay the Tax

It may sound strange, but your estate is often in a stronger position to pay the tax than you are during your lifetime. While you are living, your retirement savings are still needed to support you. Triggering the capital gain early could mean withdrawing a significant amount from those investments to pay the tax, potentially creating additional taxable income and leaving you with less money for retirement.

When you die, you are generally treated as though you sold your capital property at its fair market value, unless it can transfer on a tax deferred basis, most commonly to a spouse. Any resulting capital gain is reported on your final tax return.

The tax does not disappear, but your estate may have access to funds that you could not, or should not, use during your lifetime. These may include life insurance proceeds, investments no longer needed to fund your retirement.

This does not automatically mean waiting until death is the best answer. It simply shows why transferring a cottage early just to avoid probate may not provide the savings people expect. The complete tax, legal and financial picture must be considered before making a decision.

Do All of the Children Actually Want the Cottage?

Taxes are only one part of the discussion and, surprisingly enough, they are the easier part in many ways. Although there can be some grey areas, we can generally estimate the tax and understand what to expect. Family dynamics, however, are much harder to predict. Each child may have a different attachment to the cottage, ability to contribute to its costs and vision for its future. These differences cannot be calculated on a spreadsheet.

This is why the family cottage is one of the most complicated estate planning topics we discuss in our business.

Suppose three children inherit the cottage equally:
*  One wants to keep it forever.
*  One lives across the country and will rarely use it.
*  One would prefer to sell and receive their share of the money

Who pays the property taxes, insurance, utilities and repairs? How is usage divided? What happens when a major expense arises? Can the child who wants to keep it afford to purchase the others’ interests?

These decisions can become even more complicated as spouses, grandchildren and different financial circumstances enter the picture.

We have seen families experience serious tension and even permanent falling out because these conversations did not happen while their parents were alive. What was intended to bring the family together ultimately divided it.

The good news is that this does not have to be your family’s story. I have shared a lot of information about how a cottage transfer works and the many tax, financial and family considerations involved. If it has created a little anxiety, that is understandable, but the goal is not to discourage you. It is to bring awareness to the potential challenges so that we can plan for them properly.


Turning the Cottage into a Successful Legacy

If keeping the cottage in the family is important, start the conversation early and keep having it. No major family decision is ever truly final. People’s finances, relationships, priorities and attachment to the cottage can change over time. Revisit the plan regularly and keep the conversation healthy and open. Honest communication among family members is always the best place to begin.

Some important questions include:
*  Do the children genuinely want the cottage?
*  Do they all want it equally?
*  Can they afford the ongoing costs?
*  What is the estimated capital gain?
*  Are there records supporting the original purchase price and improvements?
*  Could the principal residence exemption reduce some of the gain?
*  Where will the money come from to pay the eventual tax?
*  If one child wants the cottage and the others do not, can the estate be balanced using other assets or life insurance?
*  Should a shared ownership agreement set out expectations for usage, expenses, repairs and a future sale?
*  What happens if one owner dies, divorces, experiences financial difficulty or simply wants out?

The right solution may involve an updated Will, a formal shared ownership agreement, an estate equalization strategy, life insurance or a planned sale. Life insurance can be especially valuable when everyone wants to keep the cottage but the estate may not have enough available cash to pay the tax. In some situations, the children may choose to purchase and fund a policy on their parents’ lives to help cover the eventual tax and preserve a property that is important to them. In other families, the best decision may ultimately be to sell and recognize that the memories do not disappear simply because the property changes hands.

Leaving a Legacy, Not a Burden

Planning for the family cottage is difficult because it means imagining a time when you are no longer there and the next generation must take over. That is an emotional conversation because you are not simply planning for a property. You are planning for a place filled with family history, traditions and some of your most treasured memories.

One of the most meaningful questions your family can consider is:

“If something happened to Mom and Dad, what would we truly want to happen with the cottage?”

The answer may change over time, and that is okay. The goal is to leave the cottage as beautifully as you intend, with clarity, thoughtful preparation and as little stress as possible for your children. Whether they choose to keep it or let it go, careful planning allows what you leave behind to feel like the gift you always intended it to be.