The Generational Handoff

A family cottage is more than a property—it’s where memories live. But when it’s time to pass it down, families often face unexpected tax bills, legal surprises and even conflict between siblings. Here’s a straightforward guide to help you structure a waterfront handoff that actually works.

Step 1: Decide What You Want to Achieve

Before you talk to accountants or lawyers, ask yourself:
• Do I want the cottage to stay in the family for generations, or just pass to my kids?
• Do I want to minimize tax now, or later?
• Do I need to avoid future family disputes?
• Do I want to protect the cottage from divorce or creditor claims?
Clarity on your goals makes the rest easier.

Step 2: Understand the Tax Basics

• Capital Gains: If you give or sell the cottage to your kids while you’re alive, you’re treated as if you sold it at today’s market value. That means tax on the increase in value. The same happens when you pass away, unless it rolls over to a spouse.

• Principal Residence Exemption (PRE): If you designate the cottage as your “principal residence” for certain years, you may reduce or eliminate the tax bill. But you can only use this exemption on one property per family per year.

• Probate Fees: In Ontario, estates pay about $15 per $1,000 of value (after the first $50,000). Avoiding probate is often part of the plan.

• Land Transfer Tax (LTT): If you give the cottage with no mortgage, there’s usually no LTT. If a mortgage is assumed, tax applies on the debt amount.

Step 3: Pick a Transfer Method

Here are the most common options:

1. Pass it through your Will
o Simple, keeps control with you.
o Tax is paid on the property’s value at your death.
o Probate fees may apply.

2. Gift or Sell to Children Now
o Locks in today’s value, avoids probate later.
o You pay capital gains tax now.
o If mortgage-free, no land transfer tax; if there’s debt, tax applies.

3. Add Kids to Title (Joint Ownership)
o May avoid probate on your share when you pass.
o But this can trigger tax today, and your child’s share could be exposed in a divorce or lawsuit.

4. Use a Trust (for those 65+)
o Alter Ego or Joint Spousal Trusts let you transfer in without paying tax immediately.
o Avoids probate, keeps control, and passes smoothly later.
o Requires annual filings but is often the cleanest option.

5. Corporations
o Usually a poor fit for family cottages. CRA treats personal use as a taxable benefit. Best avoided.

Step 4: If More Than One Child Will Own It

This is where families often stumble. If two or more children inherit together, you need a Co-Ownership Agreement. This should cover:
• Who gets the cottage when (booking system)
• How costs are shared (maintenance, taxes, big repairs)
• What happens if one child wants out (buy-out rules)
• Guest, rental, and renovation rules
Without this, conflict is almost guaranteed.

Step 5: Watch for Family Law Risks

In Ontario, a cottage can sometimes be considered a matrimonial home, giving a son- or daughter-in-law rights in a separation. Marriage contracts or careful structuring can help protect the family asset.

Step 6: Don’t Forget the Annual “Paperwork”

Even after the handoff, there may be compliance:
• Trusts: Annual tax filings.
• Underused Housing Tax (UHT): Usually not an issue for Canadians who use their cottage, but certain ownership structures (like corporations or trusts) may require filing an exemption form every year.

The Bottom Line

There’s no one-size-fits-all solution. The best structure depends on your age, tax picture, whether your cottage is mortgage-free and—most importantly—what your kids want.
For many families, the simplest route is to pass the cottage in a Will with tax deferred until then. For those 65+, a trust can combine probate avoidance with smooth succession. And if kids are involved now, think hard about fairness, co-ownership rules and protecting the property from in-law risk.

Key Takeaways

• Think through goals first, then structure.
• Expect tax on gains—but plan with the PRE and trust options.
• If more than one child is involved, a co-ownership agreement is critical.
• Be mindful of family law exposure.
• Keep an eye on annual filings if trusts or special structures are used.

Start with family discussions, engage qualified real estate, legal and tax professionals and review existing estate plans. Successful waterfront succession demands expert guidance tailored to your family's circumstances. 

The right plan doesn’t just save tax—it keeps your cottage a source of joy, not tension.