In last month’s column, I discussed some of the key issues involved in cottage succession planning. This month, I’ll consider four case studies that highlight how different strategies can work in different client situations. Each strategy can help minimize the financial impact of a cottage transfer, while also managing some of the emotional impact.

The family I introduced last month has owned an extensive island vacation property since the late 19th century. Several years ago, the property was subdivided into four smaller lots, each with a modest cottage. These are currently owned by two brothers and two sisters, each with children who are starting families of their own. Further subdivision of the property is not possible, nor does the family want to see any or all of the properties sold to outsiders.

What follows is an account of each brother’s and sister’s situation as they consider transferring at least partial ownership of their properties to their children, followed by the specific strategy that might best suit his or her needs.


The facts: Albert has three children, who have all begun spending a lot more time at the family cottage since their mother, Albert’s wife, passed away six years ago. Although he is the eldest of the four siblings, Albert, an artist of relatively modest means, was the last to marry and start a family; his children are only now in their twenties. All have expressed a keen interest in one day owning a share of the property, and while all three have promising career prospects, none has the resources today to cover the substantial capital gains taxes that would be incurred by a transfer of the property.

The strategy: Set up a life insurance policy to fund future capital gains (and probate) taxes triggered by Albert’s death. Because Albert and his children cannot pay the capital gains taxes that would be triggered by a transfer, and might not be able to in the future, they could set up a life insurance policy that would pay out on Albert’s death. When he dies, he would be deemed to have disposed of the cottage. His estate would then have to pay the tax on the capital gains realized on the cottage’s disposition. With this strategy, the insurance policy’s tax-free payout could be used to cover most, if not all, of the capital gains and probate taxes owing to the disposition, as well as any probate taxes incurred in settling Albert’s estate. Of course, Albert must specify in his will that the children inherit the cottage.

One consideration with this strategy is that the exact size of the capital gain triggered on Albert’s death is difficult, if not impossible, to predict. Additional funds might be required if the insurance payout is insufficient to pay the final tax; alternatively, there could be money left over if the insurance payout exceeds the final tax. The latter may seem to be the preferable outcome, since the beneficiaries of the estate would be happy with the additional windfall, but the downside is that Albert’s premiums would have been higher than necessary.

Since the children will ultimately benefit from the inheritance of the cottage, the cost of the policy could be borne by them. In the meantime, the family can continue enjoying the property while making affordable periodic contributions toward their respective ownership stakes, secure in the knowledge that it will remain in the family for years to come.


The facts: Carol and her husband have three well-to-do adult children; all have young children of their own. In recent years, the family has dispersed for career reasons, and now only Carol and her husband, their youngest son and his family live within driving distance of the cottage. (The other two children live in Texas and Hong Kong.)

None of Carol’s children want to relinquish interest in the family cottage, and each has expressed a deep attachment to the place. This is particularly true of the two children who relocated abroad; one sentimentally refers to the cottage as “my little piece of Canada.” Together, the children have offered to buy their parents out in equal shares, at a “family discount.” Carol, who has become less interested in spending her summers at the cottage, has made it known that she would like to give the property to the children now to avoid substantial capital gains and probate taxes down the road.

The strategy: Give the property to the children to avoid double taxation. Assuming Carol has adequate resources to fund the capital gains taxes associated with transferring the cottage to the children, the family would be better off in this instance transferring the property by gift than by a discount purchase. This is because Carol will pay the same amount of tax regardless of whether she sells the property at full market value (FMV), at a discount, or for nil consideration; her proceeds are considered to be the FMV of the cottage at the time of transfer. The ultimate tax cost to the children, however, may be quite different depending on their role in the transfer. If the children were to pay FMV, that becomes their tax cost for a future sale. If the cottage is an outright gift (meaning the children pay no consideration), then the tax cost to the children is also the FMV on transfer. However, if the children were to purchase the cottage for an amount less than FMV, their tax cost would be this lower price paid. By making a discount purchase, the children are effectively ensuring they’ll get hit with a larger tax bill down the road when it comes time for them to pass the cottage on to the next generation.

These tax rules may seem unfair, but the point is to know and understand them so you don’t get caught offside.

This strategy may be particularly appealing today in light of current depressed market conditions. It also avoids probate tax, since the property is transferred prior to death.

It is also advisable in this instance that the children carefully draft a co-ownership agreement, given the children’s varying levels of use and ability to share in the property’s upkeep. The agreement should cover items like the division of annual maintenance costs, property taxes and capital improvements, as well as guidelines relating to future transfers of ownership.


The facts: Robert and his wife are both recently retired university professors. A year ago, they sold their city home and moved their belongings to the family cottage, where they now spend the warmer months of the year. During the cooler months, they rent a condominium property in Florida. Their children, who spent much of their childhood summers at the cottage, have different levels of interest in the family’s summer property. In fact, only one, the eldest, has expressed any real interest in the cottage and makes the trek out with his family with any regularity.

The strategy: Designate the cottage as a principal residence and hold the property for as long as possible. In this case, the parents are best advised to designate the family cottage as their principal residence and avoid transferring the property until much later. For tax purposes, a disposition is not triggered until the cottage is sold or transferred. When the cottage is transferred to the children (or child), no taxes will be owing on the portion of the gain that relates to the time the cottage was used as a principal residence. Here, it makes a lot of sense to optimize the tax-free gain by using the principal residence exemption. Furthermore, although currently only one child has an interest in owning the cottage, the other children may change their minds in the future.


The facts: Marie, her husband, and their three adult children, who are all married and have children of their own, make extensive use of their family cottage and have been sharing the property cordially for years. Each family unit, including the parents, shares equally in the maintenance expenses, taxes and general upkeep, and they have, with only rare exceptions, been able to divide their usage with little or no conflict. Given their relatively uncommon harmony, the family is simply looking for a way to pass on their beloved heirloom to future generations, while minimizing taxes.

The strategy: Set up a non-profit organization. Setting up the family cottage as a non-profit organization can be an effective strategy for passing a property down to future generations tax efficiently. The property is transferred to a non-profit organization, causing a deemed disposition to occur at the outset of the arrangement, so an initial funding strategy is essential. Once the transfer is complete, however, capital gains and probate taxes can be avoided for generations of cottage-goers to come, as long as the organization remains in place. With this strategy, owners become due-paying members of the organization; when the property is passed to new members, there is no inheritance to tax.

A non-profit organization must establish a board of directors to set out the organization’s bylaws, including membership criteria, rules relating to dues and maintenance, and other operating requirements. Also, the Canada Revenue Agency requires that the organization submit an income tax return each year (declaring no income), and the organization must ensure its bylaws are adhered to in order to maintain its non-profit status.

This is an elaborate strategy, so expert advice here is a must. However, it can be a highly effective strategy for the right family in the right circumstances.

The discussion above does not delve into the many finer details that must be considered and managed when developing a client’s cottage succession plan. Professional expertise is essential. Equally important is having the family sit down together to engage in a frank discussion about how they see themselves in relation to their cottage property today and in the future. Your role, in focusing their attention on these details, is really at the heart of ensuring an effective transfer of a treasured family heirloom.