Consider these issues when planning cottage succession

By Margaret O’Sullivan | September 22, 2017 | Last updated on September 21, 2023
6 min read
Wooden dock with chair on calm fall lake
© Elena Elisseeva / 123RF Stock Photo

A cottage or other vacation home can be a significant personal, emotional and financial commitment.

When it comes time to pass the home to the next generation, proper planning is required—otherwise, vacation homes can become the basis for family disputes, turning what should bring the family together into what can tear the family apart.

In this article, we discuss several considerations that, if properly addressed, can help ensure a successful ownership transition.

Personal and family considerations

Emotional attachment and desire for ownership

Some vacation homes have been owned for generations and may have an almost sacrosanct significance to the family. If a vacation home has only been recently purchased, or has not been used by the entire family, emotional ties may be fewer and planning will be less challenging.

Further, it’s possible that some family members are more emotionally attached to the vacation property than others. It’s important for the owner to understand this dynamic when creating the succession plan, as some family members may prefer not to inherit a share in the property. Although those members may not want to own the home, the owner may still wish to include them, potentially via a cash legacy or other means to ensure equal distribution of the estate.


While family members may wish to own the family cottage, they may not be able to afford to maintain it, especially as the structure, septic and docks age. As property values in certain areas have risen sharply, so have property taxes. Without proper planning, leaving the family cottage to a child or other beneficiary who cannot afford their share of costs invites a host of future problems, and is often the source of family disputes.

Owners should also stipulate how maintenance responsibilities and expenses should be allocated. Otherwise, family members with less ability to pay expenses may expect those with greater resources to pay more. Family members who use the property less often, or who are not as handy, may expect to do less physical work despite equal ownership interests.

Finally, scheduling visits and issues of guest access, especially in regard to in-laws and ex-in-laws, is often a source of friction and should be addressed as part of the overall plan.

Tax considerations

Canadian and Ontario tax

When vacation homes increase in value, owners have to deal with Canadian capital gains tax. Unless there is a tax-free rollover to a spouse, significant capital gains taxes may be payable on transfer of the property during lifetime or on an owner’s death.

Further, in Ontario and other high-probate provinces, passing on a vacation home to beneficiaries (not to a joint owner with right of survivorship) can mean a significant estate burden. Probate fees in Ontario (known as Estate Administration Tax) are approximately 1.5% of the value of the property (e.g., $15,000 for a $1-million property).

Both capital gains tax and probate fees, unless otherwise provided for, are payable from the owner’s estate. It is important to estimate the terminal tax bill in advance of the owner’s death, and determine how those taxes will be funded. This is especially important if only some family members will receive the vacation home as a bequest, but the residue of the owner’s estate will be left to different family members; in such a situation, the remaining members’ portions could be reduced unfairly by taxes. It is also necessary to determine if there are enough liquid assets to pay the terminal tax bill without having to sell the vacation home. If not, the owner could consider using life insurance to fund the taxes.

Canada-U.S. tax

Vacation properties located outside of Canada can pose additional tax and succession problems for Canadian-resident owners’ estates. Many Canadians own U.S. real property, which brings the Canadian owner’s estate within the U.S. gift and estate tax regime. As a result, U.S. vacation homes may require additional planning.

U.S. estate tax on U.S. real estate owned by a Canadian resident (who is not a U.S. citizen) is calculated based on the value of U.S. property owned at the owner’s date of death. There is an available tax credit, and two options for its calculation. One method is based on the value of all U.S. situs property in relation to the owner’s worldwide estate, and the other option is a basic credit of approximately US$14,000.

The top U.S. estate tax rate is 40%. In 2017, if an owner’s worldwide taxable estate exceeds $5.49 million, he or she is exposed to U.S. estate tax. The U.S. tax rates are permanent, subject to future legislation. Individual advice is required to calculate your client’s exposure.

Family law considerations

Treatment of a matrimonial home in equalization of family property

The Family Law Act (Ontario) gives special treatment to matrimonial homes, which can include not only a primary residence, but also vacation homes under the following conditions:

  • if they are occupied by spouses or by a spouse and their children as a family residence, and
  • at least one of the spouses has an interest in the property.

Accordingly, anyone with an ownership interest in multiple residences can have more than one matrimonial home. Indirect ownership in a vacation home, including through a corporation or trust, may also be included in some circumstances.

Equalization refers the fact that on marriage breakdown, the spouse whose net family property is the lesser of the two net family properties is entitled to one-half the difference between them.

Gifts received before marriage

A beneficiary may receive or inherit a vacation property before getting married. Under the Family Law Act (Ontario), the post-marriage increase in all property owned at the date of marriage, as well as any income arising from it, is included in the calculation of the value of each spouse’s net family property for equalization purposes. There is one exception: if the same matrimonial home is owned at date of marriage and date of marriage breakdown, no deduction is allowed for it.

If this default situation is undesirable, the beneficiary and spouse could sign a domestic contract to provide otherwise.

Gifts received during marriage

A beneficiary may also receive or inherit a vacation property after marriage. The capital value of gifts and inheritance received during marriage, with the exception of a matrimonial home, is excluded from the equalization calculation. It’s also possible to exclude the income from and the increase in value of gifts or inheritances received during marriage if the donor stipulates it in a deed of gift, by will, or otherwise in writing. For this reason, it is common practice in Ontario for wills and deeds of gift to include such a special clause.

Next time, we’ll look at options for structuring vacation home ownership transitions.

Co-ownership agreements

Co-ownership agreements are an effective planning tool when a vacation home has multiple owners, since they can prevent disputes and make decision-making easier. A co-ownership agreement may include terms for deciding on and dividing property use, expenses and property improvements.

Other matters that can be dealt with include:

  • providing a decision-making process on the transfer or sale of the property, including on death, incapacity or marriage breakdown of an owner;
  • eligible persons to whom the property can be transferred during lifetime and on death;
  • options to purchase and rights of first refusal;
  • how to deal with a default in payment of expenses; and
  • encumbrance of the property.

Where successive generations are to hold the property, the likelihood of disputes increase, in particular where beneficiaries have different wealth and income levels. A co-ownership agreement can mandate that funds are set aside for maintenance costs and repairs, alleviating the direct financial burden on current and future beneficiaries. This can also help avoid disputes regarding how such expenses are to be paid.

Margaret O’Sullivan

Margaret O’Sullivan is founder of O’Sullivan Estate Lawyers LLP.