Millions of Canadian families own recreational properties — cottages, cabins, ski chalets, lake houses — that have appreciated dramatically over the decades. Passing these properties to the next generation is often emotionally important to the family. But it comes with significant tax and planning challenges. Without proper planning, the capital gains tax bill on a cottage can run into hundreds of thousands of dollars, and family disputes over ownership are common.
When you die in Canada, you are deemed to have sold all capital property at fair market value. For a cottage bought 30 years ago for $100,000 that is now worth $850,000, this triggers a capital gain of $750,000. With 66.67% of gains above the $250,000 threshold now included in income (post-2024 rules), this can result in federal and provincial tax of $150,000–$300,000 depending on your province — due and payable from the estate within months.
The principal residence exemption applies only to one property per family unit per year. If your primary home is designated as your principal residence, your cottage is fully exposed to capital gains tax on death.
Every Canadian individual can designate one property as their principal residence for each year they own it. A family unit (married couple) gets one designation per year between them. If you and your spouse own both a home and a cottage, you can allocate some years of the exemption to the cottage to partially shelter gains.
This strategy works best when the cottage has appreciated significantly relative to the house, or when the house qualifies for the exemption for most years while the cottage is more exposed. A tax advisor can calculate the optimal allocation.
One option is to sell the cottage to your children at fair market value during your lifetime. This triggers capital gains now rather than at death, but may allow you to use strategies like the capital gains reserve (spreading the gain over up to five years) and gives you certainty over the tax outcome.
Selling at fair market value also resets the cost base for your children — future appreciation after they acquire it will be capital gains in their hands.
You cannot gift the cottage tax-free. Any transfer to an arm's-length person (children are considered non-arm's-length, but the same rules apply) is deemed to occur at fair market value for tax purposes. Transferring the cottage at below-market value (or as a "gift") still triggers capital gains on the full fair market value. There is no way to avoid capital gains by simply gifting the property.
If keeping the cottage in the family is the priority, life insurance is one of the most effective strategies for funding the anticipated tax bill. A permanent life insurance policy (whole life or universal life) can be structured to pay out an amount at death sufficient to cover the capital gains tax. The insurance proceeds are received tax-free and can be used to pay the tax without requiring the family to sell the cottage.
This approach requires purchasing insurance while you are insurable — ideally in your 50s or early 60s when premiums are still reasonable.
A family trust (inter vivos trust) can hold the cottage and allow multiple family members to use and ultimately share in the ownership. Assets in a trust are not subject to probate. However, trusts have their own tax rules — they are deemed to dispose of capital property every 21 years (the "21-year rule"), which can trigger capital gains if not planned for. Trusts also have ongoing administrative requirements.
When multiple siblings inherit or are given a cottage, disagreements about use, expenses, and eventual sale are extremely common. A co-ownership agreement (drafted by a lawyer) can address:
Without such an agreement, differing opinions about the cottage can damage family relationships and force an unwanted sale.
Your "adjusted cost base" (ACB) of the cottage is the original purchase price plus capital improvements made over the years. Capital improvements (a new deck, roof replacement, addition, septic system replacement) increase your ACB and reduce your eventual capital gain. Keep records of all capital expenditures over the years. Many cottage owners have lost tens of thousands of dollars in unnecessary capital gains tax simply because they threw away old receipts.
Cottage succession planning should ideally begin 10–20 years before the anticipated transfer, when insurance is more affordable and there are more strategic options available. The worst time to plan is in crisis — when serious illness or death is imminent. Start early, review periodically, and coordinate your plan with your will and overall estate strategy.
KOHO offers free banking with no monthly fees. Use code 45ET55JSYA for a bonus.
Open KOHO Free — No Fees — Code 45ET55JSYA