During the Covid-19 pandemic, the demand for — and cost of — cottages has spiked as people have transitioned to remote work and sought refuge in rural communities. However, owning a family cottage can be a double-edged sword: the property can be a source of great family memories, but also a source of conflict and division.
Whether a cottage property has been newly acquired or owned for decades, careful succession planning is essential, particularly if the testator wants to maintain family harmony. A recent Ontario Court of Appeal decision (Donaldson v Braybrook, 2020 ONCA 66) shows the risks.
The case involved a mother, who owned the family cottage, and her four adult children. While the mother was alive, she gave each child access to the cottage by allocating specific weeks each year.
In 1995, the mother secretly transferred ownership of the property to herself and only two of the four children. The other two children each received an interest in the property that granted them access during their lifetimes.
Approximately five years later, the mother told one of the children with ownership about the transfer. But she didn’t mention the interest in the property granting access to the other two children. Because of ambiguous wording in the registered transfer document effecting the change in ownership, a key issue in this case was determining each child’s property interest.
The mother died in 2013. Three of the four children continued to use the cottage as they had when their mother was alive. About six years later, when the children with the ownership interest decided to sell the cottage, one of the other children refused to release her interest in the property. She commenced a court action, claiming to be an equal owner and, among other things, to have the exclusive right to use the property.
The lower court held that the child who commenced the lawsuit had a life interest in the cottage property with a right to exclusive use. However, the Court of Appeal overturned the decision. It held that the mother intended for all of her children to continue enjoying shared use of the cottage after her death as they had during her lifetime. The court held that two of the children had ownership interests beyond the shared right of use, the ruling said, while the other two maintained a non-exclusive lifetime right to use the cottage.
A release from the children of their interest and entitlement to shared use would likely be required before the cottage could be sold.
What did we learn?
This case provides valuable takeaways for succession planning involving the family cottage.
The mother had thought about succession planning, and even went so far as to transfer ownership of the property to two of her children. However, the transfer was done in secret. Failure to communicate with all her children regarding her intentions for the cottage added to the uncertainty regarding each child’s entitlement, which was exacerbated by the ambiguous language found in the registered property transfer documentation.
Manage beneficiary expectations
The Court of Appeal found the children agreed that the mother’s allocation of time for access to the cottage was always fair. However, the mother transferred ownership to only two children. Given that they all had equal access to the cottage, each child understandably expected equal ownership. Managing expectations could reduce the likelihood of costly court battles.
Clear testamentary documents
On the same day the mother transferred ownership of the cottage property to herself and two of her children, she also signed a new will. She later signed two new wills and made revisions to one of them, but none provided direction regarding the changed ownership of the cottage. Stating her intention in her will for two of the children to be co-owners and specifying the interest the others would receive would likely have clarified the ambiguity in the transfer document and made each child’s entitlement clear.
There are many planning options for transferring a cottage property. Clients can gift the property outright, provide for conditions under which the property may be purchased by family members, or transfer it to a trust or a (non-share) capital corporation.
For owners wanting to keep the cottage in the family, succession planning should not be an afterthought. Careful planning that includes communication, managing beneficiary expectations and ensuring testamentary documents align with the succession plan may go a long way to preserving the family cottage as a source of treasured memories.
Akua Carmichael , LL.B, J.D., TEP, director, tax and estate planning services, with Empire Life. Akua.Carmichael@empire.ca