Recurrent trips to the family cottage are a sacred part of many Canadian families. Providing an escape from the hustle and bustle of everyday life, it beckons us and our loved ones to the picturesque Canadian landscape with fresh lakes and green trees enveloping places where memories are made.

Family traditions of summers well spent, or Thanksgiving dinners with a backdrop of autumn colours are created in these warmly lit cabins that are found scattered across the country. Their importance in our memories is unmistakable.

Thinking about the future of the family cottage, however, is not always as easy as the times enjoyed there. Without proper consideration, there are often tax consequences that develop, and potential family disputes for the eventual continued ownership, maintenance, or in some cases sale of the property. It goes without question that if your cottage is an important part of your family legacy, planning early is incredibly important.

While we can pass along the cottage to spouses without tax consequences, on the last survivor’s death there will be a capital gains realized. That’s because whether it’s a sale or a transfer, putting the cottage in another party’s name will create a deemed disposition at fair market value. That means that the tax authorities will assume the property was sold for market value at the time of transfer, and trigger the taxes owing on the gain realized. That can be a whopping amount for those who bought their cottages for a considerably lower price than its current value. Without planning for that tax consequence, it’s not unusual to see the family cottage being sold in order to satisfy the payment.

While planning for your cottage takes a well thought out plan with a tax planning expert, here are some options that are often considered by cottage owners:

  • Sell the Cottage

Selling the cottage during your lifetime allows for a realization of tax and the opportunity to take advantage of tax planning by strategizing the primary residence exemption for capital gains. It also avoids any potential conflict that may occur in the family with respect to ownership and maintenance of the cottage in the future. You can choose to sell to an outside party, or within the family, the option is yours when exercised during your lifetime.

  • Put the Cottage Into a Trust

A trust is a legal relationship where a party, the trustee, holds title to an asset for the benefit of another party (or more), the Beneficiary/Beneficiaries. Putting the cottage into trust means transferring title to the cottage during your lifetime, or through a will, and according to the terms of the trust agreement. Doing so during your lifetime means, you create an intervivos trust. This kind of a trust helps avoid probate fees and also allows you to strategize the primary residence exemption for capital gains purposes. There is a deemed disposition at fair market value at the time the cottage is placed in the trust, but the terms of the trust can ensure the cottage remains in the family. Directing title to the cottage to a trust through a Will is called a testamentary trust. Both types of trusts have many considerations. Tax planning is the obvious one, but things such as maintenance or options to purchase for family members are other aspects that can be planned ahead of time for the benefit of the family.

  • Transfer Title to the Cottage as Joint Tenants

Transferring title to the cottage to family members as joint tenants provides them with the right of survivorship. This triggers a partial deemed disposition of the property at fair market value and therefore also triggers a tax consequence. There are other considerations that must be considered—such as possible effects of marriage breakdowns, creditors or disputes between co-owners. While sometimes a quick option, this option isn’t always the best and should be carefully considered with your legal and tax advisors to ensure it’s the right plan for you.

There are many considerations to keep in mind when planning for the future of your family cottage. Planning ahead of time is the best thing you can do. Doing so not only ensures the lasting legacy of your family traditions, but also helps you effectively tax plan throughout your ownership of the cottage. While there’s too much to consider to discuss fully here, if you’re interested in learning more on how to plan for your family cottage just contact our office! We’d love to help you plan your lasting family legacy.