Who wants the cottage? Help clients decide

August 24, 2017 | Last updated on September 15, 2023
3 min read
Wooden dock with chair on calm fall lake
© Elena Elisseeva / 123RF Stock Photo

Now’s the time to talk with clients about estate planning, particularly if they have a vacation home.

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“Summertime is when families often get together and discuss what to do with the vacation property,” says Jamie Golombek, managing director of tax and estate planning with CIBC Wealth Strategies Group.

The best way to assist is to first help clients understand the goal for their properties, and that should be done before helping clients hire lawyers and accountants who will find the most tax-efficient way to avoid capital gains tax on appreciated vacation property.

It’s important to discover whether or not clients’ adult children want the property — the answer might surprise you.

The cottage or vacation property may have sentimental value, says Golombek, but what if, from a practical perspective, the kids are not in a position to use it as regularly as your clients? Financially, he adds, the kids “may not be in a position to support [things like] ongoing maintenance costs.”

A family conversation is required to understand everyone’s wishes: who wants the property, if they’re willing to assume the associated financial responsibility and how to equitably distribute the estate among children, if that’s desired.

“Most parents do want to treat kids equally, with some allowances for changes in circumstances and perhaps other types of financial or emotional issues,” says Golombek. “In most cases, there are ways to give a property to one kid and give cash or life insurance proceeds to another kid. But ultimately you want to have that discussion.”

Read: Young clients don’t want to miss out on cottage ownership

Choosing a principal residence

Once the family’s goal for the property has been discussed and clarified, it’s time to plan.

“The biggest issue with most properties […] is that there could be a capital gains tax on the deemed disposition of the vacation property on [death],” says Golombek. “In many of these situations in Canada, we have large increases in the price of real estate, and the capital gains could be significant” — potentially larger than any gains on a main residence.

“The good news is that you are allowed to choose, at the time of disposition, which of your properties will qualify for the principal residence exemption,” says Golombek.

Read: How to claim the principal residence exemption

If clients have a home in the city and a vacation property, he explains, the decision whether or not to claim the principal residence exemption (PRE) is made when they decide to sell one or the other. The same rule applies on death, says Golombek; if your client dies owning two properties, one can be chosen as the principal residence, though both are subject to deemed disposition.

Golombek notes that a couple can have only one principal residence, and both selling and gifting to children are deemed dispositions that could potentially be covered with the PRE.

To choose a property for the PRE, Golombek says clients should consider:

  • the appreciation of the property being sold or gifted compared to the appreciation of the other property; and
  • the expected future appreciation of the property not sold or gifted.

“It’s only one exemption for years of multiple ownership, but ultimately you may want to save that exemption later on when you sell the second property,” says Golombek, referring to potential future appreciation.

Last, he reminds clients that the PRE must be claimed on tax returns. “That is a new change effective for 2016,” he says. Thus, “it’s very important to think about the type of planning you’re going to do — which residence is going to be exempt — because now you have to tell CRA about it when you dispose of the residence.”


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