Family cottages: what to consider before transferring your property to the next generation

With the arrival of cottage season in Canada, cottage owners often inquire about the transfer of the family cottage to the next generation. More than any other family asset, ownership of the family cottage is much discussed amongst families because it often holds significant sentimental value for both the owners and their children. More often than not, 1st generation cottage owners want to pass along ownership to their children so they can share similar memories of the cottage with their own kids. However, the next generation of cottage owners may not be as eager to own the cottage as their parents.

To further complicate the matter, sometimes 2nd generation family members would love to give their children the opportunity to create a lifetime of memories at the family cottage, while some of their siblings would prefer to be cashed out instead of inheriting partial ownership. Nonetheless, it is important to note, any transfer of ownership often leads to significant income taxes, especially if the cottage has been owned for decades.

When cottage ownership is transferred from parents to their children or a 3rd party, if there is an increase in value of the cottage property from the time it was purchased, there will be a deemed disposition, which could lead to  a significant capital gain and thus a hefty tax bill.  Therefore, before any transfer of land, tax minimization strategies should be evaluated.

Here are four potential scenarios  to review and consider before selling or transferring the ownership of your family cottage to the next generation:

1. The cottage can be gifted to the next generation. Although no cash changes hands, this results in a deemed disposition to the transferor. The difference between the market value at the time of the transfer over the original cost of the property (plus any improvements) would be considered a capital gain and income taxes could apply. In such a scenario, the transferors should ensure they have cash to pay the income taxes on the transfer. To minimize or defer the income tax hit, they can gift portions of the cottage over several years to take advantage of tax deferrals and marginal income tax rates. The family can also take a mortgage on the property to pay for these income taxes.

2. The cottage can be sold to the next generation. The sale must occur at fair market value and income taxes could be paid on a capital gain. If a vendor take back mortgage is given, a capital gains reserve could be claimed against the income allowing, the income inclusion to be spread out over a maximum of five years, allowing for a tax deferral as well as the possibility of a lower marginal tax rate on the income. If the debt is still outstanding at the time of the vendor’s death, the debt could be forgiven with no income tax consequences.

3. The cottage can be transferred to the next generation on the death of the owners, if outlined in the owner’s will. There would be a deemed capital gain at death. It would be part of the deceased’s estate and divided amongst beneficiaries. The executors of the will would distribute ownership of the cottage to the beneficiaries, as per the will, and will need to pay the income taxes on the appreciation of the cottage from other assets of the estate. Any life insurance proceeds would be available to help offset these taxes. As outlined above, a mortgage could also be taken on the property to assist with these taxes.

4. The cottage can be sold on the market to a third party. Sometimes, for a myriad of reasons, it may make the most sense to sell the cottage outright to a third party. Any capital gain realized on a disposition would be taxable. This is not really part of the topic as it does not deal with an ownership transfer.

It should be noted that in all of the above scenarios, the transferors may potentially take advantage of the principal residence exemption and this could shield the transferors from some income taxes. One also must be aware of potential land transfer taxes on a transfer.

If you are thinking of transferring or selling your family cottage, reach out to the Zeifmans Real Estate team or your Zeifmans advisor, to help guide you to find the best outcome for you and your family, at 416.256.4000  or


Q&A with Partner, Jennifer Chasson

Q&A with Partner, Jennifer Chasson

With over 25 years of experience and 100+ successful transactions under her belt, Partner, Jennifer Chasson, brings invaluable expertise to the table. Whether it’s guiding as an advisor, mentor underwriter, ...