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Cottage and Taxation: “A ticking tax time bomb”

As we’re heading into the autumn months and many cottage owners begin to slow down their time spent at the cottage, it’s a perfect time to speak to them about the importance of keeping their family cottage for future generations. Prices of real estate have risen dramatically in many parts of Canada over the years. Recreation properties are no exception. With the current covid-19 pandemic and the impact it’s had on travel restrictions and working arrangements, the demand for cottages and other recreational properties have resulted in a major purchasing boom. According to the Financial Post, the Township of Muskoka Lakes, Ontario, a popular location for high end cottages saw prices increase by more than 70% since the pandemic began. Royal LePage, a major Canadian real estate firm, reported that prices of recreational properties went up 11.5% in the first 9 months of 2020 alone. These soaring property values and related taxes have made passing the family cottage a lot more complex than it used to be. It’s virtually a “tax ticking time bomb” waiting to happen. In this article, we’ll briefly touch upon the various tax and estate planning strategies available to Canadians to help minimize this impact and keep those assets intact for their family to enjoy for years to come.


After 1981, a couple (either married or common-law) may designate only one of their residences as their principal residence for each of the years that they owned multiple residential properties. Any other property (cottage included) is considered an investment property and therefore, upon disposition of that property, capital gains tax will apply. The definition of “disposition” can either be from an actual sale (actual disposition) where money/consideration is received, or a gift (deemed disposition). Regardless of the type of disposition, both are treated the same for tax purposes. A capital gain is simply the difference between an assets original purchase price (adjusted cost base or ACB) and its fair market value (FMV) at time of disposition (sale or gift). For example: let’s say the cottage’s original purchase price was $500,000 and it’s FMV is $1,500,000 (prior to the transferring of the cottage from parents to children). This will result in a capital gain of $1,000,000. Since only 50% of the capital gain is considered taxable, $500,000 will appear in the taxpayer’s tax return. Based on a marginal tax rate of 53%, the resulting tax bill is $265,000. A spousal rollover can postpone this taxable event until the eventual passing of the last surviving spouse.


Pay taxes now and defer future growth/tax to your kids:

Set up a trust for the cottage: This is called an inter-vivos trust or a living trust. This allows you to maintain control over your cottage which gets distributed to your beneficiaries in the future. Upon setting up the trust, although there’s the advantage of transferring any future growth (and tax liability associated with it) to the beneficiaries, this will also trigger taxes immediately on the accrued gains to date. Generally, you’ll find this planning technique works best in newly purchased cottage scenarios where there’s little to no accrued gains. For a more in-depth discussion and other issues involving this strategy (ie probate fees, 21 yr disposition rule, etc) other strategies discussed below, please register to the up-and-coming “Cottage and Taxation “presentation on Sept 9th, 2021 at 10am EST.

Transfer the ownership of your cottage to your children: From a tax perspective, assuming it’s done correctly, the result is the same as the living trust scenario above (immediate tax bill on accrued gains and deferral of future growth and taxes associated in the hands of beneficiaries). The downside is loss of control. If done incorrectly, this can result in double taxation. On a cautionary note, CRA will generally treat transfers at FMV regardless of the actual price sold for or given away.

Defer tax liability until death & Funding options:

Designating your cottage as your principal residence: Your principal residence is sheltered from capital gains tax. If you own more than one property and your cottage has appreciated the most, this strategy can reduce the amount of tax charged to your estate. You also, don’t have to live at the cottage full time for this to work. Remember, after 1981, a couple (either married or common-law) may designate only one of their residences as their principal residence for each of the years that they owned multiple residential properties. More details will be provided during our Sept 9th presentation, on the mechanics behind this planning technique.

Up until now, we’ve only addressed ways to minimize the tax bill, which for some strategies, forces us to pay the taxes now on accrued gains. If instead, we decide to hold on and defer paying the taxes with hopes of eventually passing on the cottage intact for the next generation to enjoy, we’ll have to consider various options to pay the bill. Generally, there are only 4 options to consider: 1) Save; 2) Sell/Liquidate other assets; 3) Borrow; 4) Life insurance.

Create a Sinking fund/Save:

One way to do this is to start putting aside money regularly to a savings/investment account today to pay the tax bill later. If you don’t have sufficient fund today, how much do you need to set aside each year and at what rate (net of taxes). The biggest problem with this strategy is that you can’t guarantee you’ll live long enough to accumulate the necessary funds to pay the tax bill. This option is obviously not guaranteed.

Liquidate other assets:

If your estate has other assets (ie investment accounts, other real estate, etc), they can be liquidated to pay the tax? Could your estate get fair market value for these assets? Are you selling assets that have sentimental value at distressed prices? Would there pay additional costs associated with selling these assets (ie commissions, etc)? All, potential concerns related to this option.


Your family can borrow against the value of the assets in your estate to pay the tax liability. Could they obtain a loan? What is the cost of borrowing including interest? Can your family afford the loan payments? There’s no certainty as to what the market will be like when it comes time to pay the bill.

Life Insurance:

One of the easiest, most cost-effective ways to pay for the tax liability is to fund the payment with life insurance,…assuming the cottage owners are insurable, of course! Also, in situations when both spouses are still alive, a joint last to die policy will work best, since it cost less than an individual policy. Life insurance provides funds exactly when your family needs them. A plan can be customized to fit your needs and budget. If parents don’t have the money to fund the premiums, the adult children can get together and pay the premiums. After all, they’ll be benefiting from this. Another benefit of the life insurance is that it provides liquidity to your estate and can help equalize your estate amongst children that will not (may not want to) inherit the cottage. This can help reduce friction and acrimony amongst the surviving family members by providing a fair distribution of assets. All and all, in comparison to the other options, the life insurance solutions can address this issue with PENNIES ON THE DOLLAR. (See table below as an example)


As advisors, our role is to disturb and motivate clients to act. Probing questions such as: “have you thought about what will happen to your cottage when you’re gone?”, If the intent is to keep the cottage in the family:,….”how would they feel if their forced to sell the cottage to pay the tax bill?”,…Would you want the cottage, which up until now was a source of joy and happiness to your family, become a burden soon after your gone? There are a number of issues, options, and emotions involved in a transfer of a family vacation property, particularly one that’s been held in the family for decades and has been enjoyed for multiple generations. Understanding the tax impact is a big one. For a more in depth discussion, please join myself and Peter Wouters, Director of Tax Retirement and Estate Planning Services at Empire Life on Sept 9, 2021 at 10am EST for a more in depth discussion on the topic of Cottages and Taxation. This webinar session will discuss issues, emotions, and options on keeping the history, memories, and ownership of the cottage in the family on a transfer to succeeding generations. Click here to register.

(A) Comparison table assumptions:

Cottage tax liability: Current FMV: $618,000, Current ACB: $500,000, FMV in Yr 30 (Last to die) based on 3% growth rate: $1,500,000. Tax liability: $265,000

Life Insurance: BMO UL Life Dimensions JLTD 60/60 m/f 20 payments of $6,154 using 1.5% GIA

Savings: $22,150 for 20 yrs at 2% net rate of return (after tax)

Sell Assets options $265,000 (assuming no distressed prices or commission fees)

Borrow: Payments of $31,865 for 10 yrs at 3.5% loan rate

This communication reflects the views of Qualified Financial Services Inc. as of the date published. The information in this publication is for general information purposes only and is not to be construed as providing individual legal, tax, financial or other professional advice. Qualified Financial Services Inc. assumes no responsibility for any errors or omissions in the information contained herein nor for any reliance placed on such information. Please seek independent professional advice before making any decisions.


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