Summer at the cottage is full of memories: dockside coffees, late-night campfires, and the debate over who’s doing the dishes. My friend Peter owns a family cottage that both his children enjoy, and he recently told me he wants to pass it on now, rather than leave it to his estate. He wants to see them enjoy it together and learn how to co-own it peacefully.
That’s a thoughtful move but one that comes with tax consequences.
Peter was thinking of selling the cottage to his kids for $100,000 which is what they could afford. But the CRA will treat it as a sale at fair market value of $1.5 million. Since Peter bought it for $300,000, that’s a $1.2 million capital gain. And under the current rules, 50% of that gain is taxable. Even though Prime Minister Carney cancelled the proposed capital gains increase, it could end up back on the table at another time, making things more costly.
It gets worse: if the children pay $100,000, that becomes their cost base, creating a double tax problem if they ever sell.
Thankfully, Peter has better options:
Option 1: Sell at fair market value to his children and take back a promissory note.
Peter can spread the tax hit over five years and forgive the balance in his will.
Insurance Tip: Use life insurance to cover outstanding tax.
Option 2: Keep the cottage in the family for future generations.
By retaining ownership of the cottage until he and his wife die, the taxes on the transfer would be deferred. Peter could then use life insurance either on his life or a joint last-to-die policy with his wife, ensuring that there would be enough proceeds at death to pay the taxes.
Thinking about passing on your own vacation property? Let’s create a plan that protects both your legacy and your family. That includes a cottage agreement and life insurance to cover the necessary taxes and possibility maintenance on the property.
As always, please share this information freely with anyone who might find it helpful.