When Larry and Brenda came into my office to discuss the problems they were having with the family’s recreational property in Muskoka, I sensed that they were looking for a new solution to an old problem and that I just might have one.

Larry was concerned that increased value of the property would bring increased tax liability on sale or death. Brenda was looking for the best method of structuring the ownership of the property, so that maintenance costs could be covered and family conflicts could be minimized.

Both sought assurance that on the transfer to their heirs there would be minimal cost in terms of tax and administration.

I suggested using a non-share capital, not-for-profit, corporation (NPO) to provide solutions to these problems.

The NPO provides the following benefits:

  • avoiding a deemed disposition of the property on the death of any one family member or the making of a gift of the property to any family member;
  • providing a framework for making decisions and continuing that authority for future generations;
  • minimizing Canadian provincial probate duties and, where applicable, U.S. estate tax that would otherwise apply on the death of a family member or U.S. gift tax on a transfer of property from one generation to the next; and
  • providing some creditor protection over an asset possessing both financial and emotional value.

I reminded Larry and Brenda that on the death of each Canadian resident, he or she is deemed under the Income Tax Act (Canada) to have disposed of all property, including vacation properties, and to have realized proceeds of disposition equal to the then fair market value of such property.

To the extent the deemed proceeds exceed the adjusted cost base of the property, a capital gain will be deemed to have been realized. One-half of the capital gain will be included in the income of the taxpayer for the year of death, and be subject to ordinary, marginal rates of taxation. Similar rules apply in respect of a gift of property during one’s lifetime. Accordingly, capital gains tax may become payable on the transfer.

Furthermore, when their wills are probated, the value of the Muskoka property will be taken into account when the probate fee is calculated. If Larry and Brenda were to use a trust to hold the cottage, that trust would be deemed to have disposed of this property every 21 years for proceeds of disposition equal to the then fair market value. That gives rise to capital gains tax (at the highest individual marginal tax rate).

Larry was concerned the NPO would be taxed the same as any other corporation. I explained it will pay no tax on its income if:

  • It’s organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit; and
  • No part of the income of the NPO is available for the personal benefit of its members.

Brenda asked how the NPO could be structured to meet all their objectives and still retain the tax benefits. I explained that both Larry and Brenda as well as their children (when the parents decide it’s timely) may be the directors and members of the NPO. The NPO would act like a club and provide recreational services to its members in consideration for annual fees and rental payments for use throughout the year.

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The article in the Globe & Mail deals with a personally-owned recreational property that is used for one purpose (e.g.pleasure) and then changes its use to another (e.g. earning rental or other income). The NPO is a separate corporation with one purpose – recreational – for its members. So long as it operates on a not-for-profit purpose and prohibits income from being made available to any member, the NPO is permitted to earn rent and remain tax-exempt.

Thursday, Jul 7, 2016 at 7:16 pm Reply


Thanks for your comments, Lorne!

Monday, Jul 11, 2016 at 10:01 am


What is the chance that the CRA would look at this NPO, and seeing that all members are directly related (and presumably there are a very limited number of members), disallow the tax-exempt status. Further, if the CRA chose to look closely, could they not determine that this is really a family trust and thus is required to have a deemed disposition every 21 years? Have there been any issues like this?

Wednesday, Jun 8, 2016 at 1:16 pm Reply


Hi WestCoaster, we’ll ask the author for his take. Thanks!

Wednesday, Jun 8, 2016 at 1:20 pm


The tax-exempt status of the NPO does not depend on the relationship of the members to each other, but rather on the non-profit purpose of the corporation and the prohibition against making any of the income of the corporation available to a member. The CRA may indeed look closely at the NPO and ascertain whether it has the characteristics of a trust or a corporation. In order for there to be a trust, three certainties must exist (and the CRA would have to have evidence to support their assumption that such certainties exist). The first is that a person makes a voluntary gift of property to another person with the intention of creating a trust, so that legal title lies with the transferee but beneficial ownership lies with one or more other persons (the beneficiaries). Where a family establishes an NPO, there is in fact no such intention to create a trust, byut rather to create a separate corporation that owns assets for its own account. The second is the identification of specific property to be transferred. This test would be satisfied. The third is that the beneficiaries of the trust would be clearly identifiable or ascertainable at the time of the transfer. There are no beneficiaries with the NPO, and so this test would fail. In conclusion, an NPO is not likely to be successfully recharacterized as a trust.

Thursday, Jul 7, 2016 at 7:10 pm


So as I read this, the last one standing scoops the pot since each membership lapses with the member’s death? Unless I am missing something, I can see where the favourite game at family gatherings might be “pistols at 50 paces on the beach at first light!”

Seriously, wouldn’t this result in the last surviving child(ren) receiving the capital value of the property while the siblings (and their families) who pre-deaceased them would receive nothing. I would rather doubt that is what Larry & Brenda were looking for.

Am I missing something?

Friday, May 17, 2013 at 6:40 pm Reply


What you’re missing is that the NPO is not a share-capital corporation. No family member acquires equity or loses equity (on death). The Board of Directors (initially Larry and Brenda) set the rules for who become future members, including children, grandchildren, etc. Those members in turn elect the Board from time to time to govern the “club” indefinitely and provide recreation to all members. This is a multi-generational wealth preservation plan. The distribution of assets is not a planned event. The only time there would be a distribution of assets would be if the family membership as a whole decided to sell the property, not reinvest in one or more other cottages, nor transfer the proceeds to a charity but distribute the proceeds. In short, the NPO structure can lead more to family harmony than to jealousy and acrimony.

Thursday, Jun 6, 2013 at 12:30 am

Lorne Saltman

The transfer to the NPO is a taxable disposition (as stated in paragraph 11 of this article). The Globe article also indicates that the transfer or deemed disposition on a change of use would be taxable events. There does not appear to be a contradiction.

Lorne Saltman.

Thursday, Sep 22, 2011 at 10:34 pm Reply