Your Family Cottage or Cabin – What You Should Know

3 minute read
Keeping the cottage in the family
The family cottage – or cabin – can evoke nostalgia and fond memories. Those memories are to be treasured and cherished by family members who watch their children enjoy nature, campfires, and build lifelong friendships. These children grow up and watch the next generation enjoy the same.

There are a few things that anyone with a family cottage or cabin in Canada should consider when it comes to either keeping it in the family or deciding to sell. How do you keep that cottage in the family? What are the costs of maintaining these priceless moments? How can you avoid any family cottage ownership problems or disputes?

Keeping the Cottage in the Family

Tax implications
Changing the ownership of a family cottage or cabin (not to a spouse), is a taxable disposition whether it is sold or the deed is transferred. Cottages are subject to capital gains taxes – and starting June 25, 2024, the capital gains inclusion rate is 50% on the increase in property value up to $250,000, and two-thirds above that amount. You cannot transfer at anything less than fair market value. However, if the cottage was named as the primary residence (principal residence exemption, or PRE), the tax bill could be reduced.

Passing Ownership to Adult Children
If a family member is interested in passing the property to an adult child (one or more), there are a few options available that are different from a traditional property sale. In most cases, there is no way to avoid paying taxes on the transfer.

Some options are to directly transfer the property by gifting it or selling it to your adult children, and they will have all rights of ownership and responsibility going forward. Another option is adding adult children as joint owners; think of it like everyone shares the same sized slice of a pie! Everyone is responsible for equal expenses and tax, and if someone passes away, the remaining owners’ portions are adjusted so everything remains equal.

There is also an option of transferring the property into a trust. A lifetime trust transfer means the parents maintain legal control as trustees, with future property value building over the years to the children as beneficiaries. This is good for children who are minors, as you would maintain control and financial responsibility until it is time to pass the property on. A tax-deferred transfer functions similarly except that the property would go to a spouse – or joint-owner – first before children, and the children would still not become owners of the property until both spouses pass away.

In all instances, there would be a tax applied – it’s just a question of whether it happens now or later.

The Costs of a Family Cottage
There are a number of other things to consider when transferring ownership of a cottage to your child, especially if there are multiple children involved. Talk to them about their wishes. Consider how they might get along, how they might use the cottage differently. What is their financial ability to take care of the cottage in the future?

As you know, there are costs to owning and maintaining the property. There is maintenance (roof, fence or deck mending), utilities, property care, and even interior updates that may be needed. If your cottage is a year-round property, do you pay for snow removal ahead of your arrival or do it when you get there? What about the yearly property taxes?

Some considerations are relatively minor things that any homeowner needs to think about; others can be deal-breakers for family members who might not have the time, inclination, or current financial stability to commit to the upkeep of the cottage.

Turning the cottage or cabin into a rental property is an option! This is a lifestyle concession as much as a financial boost, as you may have to concede prime times when you would like to be there yourself. Remember, you’ll need to claim the rental income.

For both parents and children, the family getaway is as much about emotion as it is bricks and mortar. Consider transferring your family cottage or cabin ahead of time to give everyone peace of mind. There are ways for parents to help offset the tax – through loans or life insurance – or for other assets to be sold to cover tax costs.

Are you thinking about passing down the cottage ownership to a family member? Speak with a member of our Wealth and Investment team today to learn more about planning your family cottage succession. We’re here to help!

Did you miss our free Webinar on Cottage or Cabin Succession? That’s okay – you can watch a recording of the presentation online at your convenience. Use the password DF4y*U56 to access the webinar.

Paul Arsenault

Paul Aresenault, CFP®, PFP®, RIS, CKA® is Director, Wealth and Investments
Branch Compliance Manager, Qtrade Asset Management Inc.

Paul has a wealth of experience helping members achieve their goals as a CERTIFIED FINANCIAL PLANNER® professional. He coaches Kindred’s Financial Planning Team and acts as our compliance manager for Qtrade Asset Management Inc. In addition, Paul is passionate about sharing his knowledge around RDSPs with members and organizations.

Search Banking Basics – Your Most Common Banking Questions Answered by Experts | Ask us Anything
Community Partner Spotlight: MEDA (Mennonite Economic Development Associates) Search