The Ultimate Tax Guide to Inheriting a Cottage in Canada

The worst time to worry about paying inheritance tax on the family cabin is after your parent(s) have passed away and your family is just learning about capital gains taxes on cottages. The tax intricacies and emotional strain involved with any inheritance is only magnified by the discussion now involving a property that is so much more than just a physical location.

For many Canadian families, the cottage (or cabin) is more than just a piece of real estate. It’s the scene of a family’s most treasured long weekends. Where one sibling learned to ride a bike, and another caught their first master angler.

Often, parents dream of passing down this cherished set of experiences and memories to their children, under a somewhat vague notion of the entire family getting to share enjoyment of this unique legacy.

Unfortunately, inheriting a cottage with siblings often results in hurt feelings due to differing opinions of fairness, and general confusion around financial details. With cottages skyrocketing in value over the past decade, capital gains taxes on secondary properties are a pressing issue when transferring property between generations. 

While there is no inheritance tax in Canada, that capital gains tax can be substantial if you anticipate the rest of your estate pushing your final tax return into those upper 50%+ tax brackets. Remember, your RRSP/RRIF accounts, rental properties, and/or non-registered account gains are going to all count as income in that final year, along with any private pension, OAS, and CPP income.

On top of all that, there are emotional decisions, potential family conflicts, and practical matters of upkeep to consider. 

Jason Heath (my personal pick for Best Financial Advisor in Canada) was consulted on this article, as he has written extensively on the topic for several publications. You can get in contact with Jason’s company by clicking here.

This guide will walk you through everything you need to know about inheriting (or passing on) a family cottage in Canada – from understanding the tax hit, to strategies for reducing that tax bill, to setting up your family for a smooth transition.

Tax Consequences of an Inherited Cottage

In Canada, there is no direct inheritance tax when you receive assets from an estate. However, that doesn’t mean that loved ones will be able to pass a cottage along tax-free. Instead, the estate of the deceased pays tax on what’s called a deemed disposition.

In simple terms, when someone dies, all their property is treated as if it were sold at fair market value (FMV) on the date of death for tax purposes. If that property has gone up in value since they bought it, there will be a capital gains tax owing on the increase. If a spouse inherits the property, the transfer can happen on a tax-deferred “rollover” basis (no immediate tax). 

But if someone other than a spouse inherits (children being the obvious example) then real estate is deemed to be sold at fair market value at death, and the resulting gain is taxable on the final return of the deceased.

For a family cottage that’s been owned for decades, this can create a hefty tax bill. Only 50% of a capital gain is included in taxable income, but if the gain is large it can easily push the estate into the highest tax brackets. Remember that the final tax return can also include other assets such as an investment portfolio, a savings account, or other rental properties. All of the capital gains from these combined assets can quickly mean escalation into the highest tax brackets. This looked to become especially pertinent last year as the Liberal government proposed increased taxation of capital gains over a certain amount – but that has now been rolled back.

In practice, what these FMV and capital gains rules amount to, is that a valuable cottage or cabin will incur roughly 25% of the gain’s value in income tax, depending on the province and exact income levels in your final year. 

For example, imagine Mom and Dad bought the lakefront cottage in 1975 for $50,000, and at Dad’s passing in 2025 (Mom passed away two years before) it’s worth $1,050,000. That’s a $1 million capital gain over the length of their ownership. Roughly half of that ($500,000) would be added to Dad’s income on his final tax return. If we assume a combined federal/provincial tax rate of around 50% on that top bracket income, the tax on the capital gain would be about $250,000. 

Ouch. 

The estate (in many cases, the inheriting children) must come up with that money, typically within a few months of the final tax filing. If Dad’s estate doesn’t have other liquid assets like cash or investments to cover a $250k tax bill, the family could be faced with a tough choice: sell the cottage to pay the tax, or find funds elsewhere (such as taking out a mortgage on the property).

Probate Fees On an Inherited Cottage

It’s worth noting that probate fees (aka: estate administration tax) may also apply when a cottage passes through an estate. Probate fees are much smaller than capital gains tax, but not negligible. 

For example, Ontario’s probate tax is roughly 1.5% of the estate’s value – so a $800,000 cottage would add about $11,000 in probate taxes (the first $50,000 is tax-free). While B.C. is similar to Ontario, Saskatchewan only charges 0.7%, Alberta caps probate fees at $525, while Quebec and Manitoba won’t charge you any probate fees at all!

Some families try to avoid probate by holding assets jointly or naming beneficiaries in a trust, but as we’ll discuss, those tactics have their own pros and cons and do not avoid capital gains taxation. 

Key takeaway: Inheriting a cottage from anyone other than a spouse will trigger a capital gains tax bill for the deceased’s estate. The more the property has appreciated in value, the bigger the tax. There’s no way to completely dodge that tax (short of the principal residence exemption, which we’ll cover next), but there are definitely ways to plan for it. 

Using the Principal Residence Exemption (PRE) for a Cottage

Canada’s Principal Residence Exemption (PRE) is a powerful tax break. Basically the government is going to let you avoid the capital gains tax we just talked about when you pass away – but only on one property!

When you sell your principal residence, any capital gain is tax-free. The important twist is that the definition of “principal residence” isn’t limited to the place you live full-time. As long as you “ordinarily inhabit” a property (even just seasonally), it can potentially qualify as your principal residence for tax purposes.

That means yes, a cottage or cabin can be designated as your family’s principal residence, even if you spend most of the year at home. However, you can only designate one property as your principal residence for each year of ownership, per family unit. If you have both a house and a cottage, the PRE forces you to choose which property’s gain to shelter from tax for any given year. In practice, most people claim the exemption on their primary home and let the cottage accumulate taxable gains. 

The strategy, then, is to optimize which property to designate for which years to minimize the overall tax bill between the two properties. You don’t actually have to decide annually – you make the designation when you sell or are deemed to dispose of one of the properties, by applying the PRE on your tax return for that year. At that point, you effectively backdate the designation for the required number of years.  

How do you figure out which property would let you shield the most from the CRA? 

You’d generally apply the principal residence exemption to the property with the higher average annual increase in value. Since the formula for the exemption is based on the number of years designated, when you bought each property is going to be important. 

This can likely be made more clear using an example. Let’s say the Smiths own two properties:

• City home bought in 2006 for $550,000, worth $1,200,000 in 2025.
• Cottage bought in 2019 for $550,000, worth $900,000 in 2025.

Both properties appreciated, but the cottage’s gain was $350,000 over 6 years (about $58k per year on average), while the city home’s total gain was $650,000 over 19 years (~$34k per year). If the Smiths were to sell both in 2025, it would save them tax to designate the cottage as the principal residence for 2017–2023, because those 6 overlapping years saw more value growth at the cottage. By doing so, the $350,000 cottage gain would be tax-free, and only the portion of the city home’s gain attributable to 2019–2025 would be taxed (about $204,000 of the home’s gain).

In contrast, if they did the opposite (shelter the city house and tax the full cottage gain), they’d be on the hook for the entire $350,000 gain from the cottage.

This can be a bit confusing, but I’ll try to sum it up here by saying:

1) No tax on either property will be owing until both Smiths pass away. When the first partner in a marriage passes away, their spouse can inherit the property without triggering a deemed disposition. (Remember, the deemed disposition is what creates the capital gain – which is what will be taxed.)

2) When the last of the couple passes away in 2025, the estate would look back on the two properties and say that the capital gain on the city home from 2006-2019 was not taxable, as it was the Smith’s primary residence at the time.

3) Beginning in 2019, the primary residence exemption should be applied to the cabin, as it will result in shielding more capital gains.

4) That leaves the value gain on the city home from 2019 to 2025, as a taxable asset. The per-year average average rise in value was about $34,000, and consequently the deemed disposition will result in a $204,000 capital gain. Because 50% of that capital gain is taxable, it could result in taxes payable of over $56,000 ($102,000 x 53.53%) if the highest tax bracket in Ontario were to be applied. 

5) Those capital gain taxes could be paid out by other assets in the estate (maybe the Smiths had some other investments, a substantial chequing account, or the city home could be sold), or it could result in a tax bill that the inheritors will have to pay if they want to hang on to the property. 

Note – The “Plus One” Rule: Canada’s tax rules give a bonus year in the principal residence formula – essentially, you can count one additional year beyond the actual years you owned a home. This often allows a family to avoid being taxed twice in one year when they swap residences.

In practice, it means that if you bought one home before selling another, you might be able to designate both properties as principal for the year of transition. This rule can eliminate capital gains for one extra overlapping year. While the calculation details are beyond our scope here, be aware that the PRE isn’t all-or-nothing on a property – partial exemptions for different periods are possible if you owned two homes at once.

Note – The $100K 1994 Rule: If your family has owned the cottage for a very long time (several decades), check if the $100,000 Capital Gains Exemption from 1994 was ever applied to it. Up until 1994, Canadians had a one-time chance to bump up the cost base of capital properties by up to $100k. Some people elected to use it on their cottage’s value at that time. 

If so, that 1994 “valuation bump” will reduce the taxable gain now. This would typically be documented on the 1994 tax return of the owner. It’s worth digging up those records or asking the estate executor to see if the cottage’s cost base was adjusted.

Reducing Capital Gains on a Cottage Using the Adjusted Cost Base (ACB)

One of the most overlooked ways to cut your cottage capital gains tax bill is to track and claim all eligible capital improvements made to the property over time. 

In the Smiths example above, we used very simple overall numbers to calculate the capital gains over the years that they owned both their city house and their cottage. In practice, we can reduce the capital gains on any property by updating the adjusted cost base to include money that was invested to upgrade the property over the years. Some examples would be:

• Replacing an old roof with a metal roof
• Installing a new septic system
• Building on an extension 
• Upgrading to new windows or flooring
• Adding a new dock or a retaining wall
• Substantial landscaping

In contrast, routine maintenance costs don’t count. So painting the trim, patching a leak, or fixing that same dock year after year doesn’t do anything to help your ACB. As a general rule, if the work simply restores something to its original condition, it’s a current expense, not a capital improvement.

Unfortunately, the CRA doesn’t publish a definitive adjusted cost base checklist, so there’s a gray zone here. But the key test is this: Does it substantially improve or extend the life of the property? 

If the answer is yes, then hang on to that receipt.

Even if you didn’t keep detailed records over the years, it’s worth trying to reconstruct the cost of major improvements now. Dig through old emails, invoices, home improvement store receipts, or even bank statements. You’ll thank yourself later (or your inheritors will).

Let’s say you spent $50,000 over the years on a few of the capital upgrades for your cottage that I listed above. That amount gets added to your ACB, reducing your taxable gain dollar for dollar. If you’re in that top Ontario tax bracket, you’re basically paying a tax rate of 26.77% on capital gains (50% of a capital gain is taxable, and the top rate is 53.53%). 

So if you found $50,000 in receipts to prove your case for moving the adjusted cost base higher, it would save you over $13,300 in taxes. 

Important! You CANNOT Avoid Capital Gains Tax by Gifting a Cabin

So, now that we know that the capital gains tax will be applied to inhering a cottage or cabin property, let’s take some time to address a common myth in regards to avoiding taxation: Gifting your cottage for a dollar to your loved ones does NOT avoid probate tax, and does not avoid capital gains tax. 

In fact, it can result in double taxation (likely the worst possible outcome).

I don’t understand how this piece of misinformation about gifting a cottage to avoid taxes got started, or why it is so persistent – but it’s just plain incorrect. 

Because my wife and I grew up in cottage country we know a ton of people who confidently say that they’re, “Going to sign over the deed for a dollar in love and kindness – in order to avoid probate and taxes.” This isn’t just wrong, it’s also going to potentially cost your inheritors time and money when your estate is being sorted out.

Maybe at some point a lawyer told folks that “gift for a dollar” gambit used to be allowed. Maybe the CRA never got around to knocking on their neighbours’ door when they did the same thing 30 years ago. Maybe around the happy hour table someone said, “Just gift it while you’re alive – then there’s no tax, right?”

Unfortunately, that’s not how Canadian tax law works.

The CRA doesn’t care about family deals – only the legal definition of Fair Market Value (FMV).

Canada’s Income Tax Act (specifically paragraph 69(1)) makes it very clear that you can’t gift an appreciated property like a cottage to a family member for less than its fair market value without triggering a taxable event. If you “sell” the cabin for $1, or just add your children to the title without charging them anything, it can still count as a deemed disposition at FMV.

Let’s say Dad bought the cabin in 1985 for $75,000. In 2025, it’s now worth $800,000. If he tries to gift it to his kids for $1, the CRA doesn’t say, “Oh nice – a family deal!” 

They state, “Cool, we’ll treat that like a sale for the value of $800,000.”

The tax hit isn’t the only risk. When you gift the property, but don’t properly account for the capital gains, it creates a false paper trail and uncertain cost base for the next generation. That confusion can cause headaches later when the new owners try to sell or pass it down.

For example, if four siblings inherited a cabin upon the passing of their second parent – but that cabin was “gifted” to them a decade prior for $1 – what’s their adjusted cost base? What date and fair market value are going to be used? If those values weren’t properly documented (and taxed) at the time of the transfer, it becomes very hard to prove later.

In the worst-case scenario, the CRA could argue that their cost base and beneficial ownership is unclear, and there is a possibility of double taxation when the siblings decide to sell or pass on their partial ownership.

Joint Tenancy and Legal Title of a Cottage vs Beneficial Ownership

When more than one owner is listed on a property, the legal definition of that setup usually falls into two main categories:

Joint Tenancy is a form of property ownership where two or more people hold equal interest in the entire property. The key feature of joint tenancy is the right of survivorship, which means that when one owner dies, their share of the property automatically passes to the surviving co-owner(s), bypassing the deceased’s estate and will entirely. 

This structure is commonly used between spouses or partners as a way to avoid probate and simplify the transfer of assets upon death. However, one important limitation is that you cannot leave your share of the property to someone else in your will – it will go directly to the other joint tenant(s) by default.

In a situation where three children co-own a cabin or cottage through a joint tenancy agreement, the last surviving child and/or their spouse are likely to own 100% of the cabin. That’s important, as they could then bequeath that cottage to whoever they want in their will going forward. The inheritors of their other two siblings (likely their nieces and nephews) wouldn’t be entitled to any ownership inheritance at all!

Tenants in Common, by contrast, allows two or more people to own a property together while retaining individual and distinct shares. These shares do not have to be equal. 

For example, one person might own 70% and the other 30%. When one co-owner passes away, their share does not automatically go to the surviving owner(s). Instead, it forms part of their estate and is distributed according to their will.

This structure is more commonly used when co-owners want greater flexibility and control over their portion of the property, such as between siblings, friends, or business partners. Because each share is considered a separate asset, each owner can sell, transfer, or bequeath their interest as they wish.

Legal Title vs Beneficial Ownership

Even more confusing: changing the names on the deed doesn’t necessarily mean you’ve changed who “owns” the property for tax purposes. In many cases, the CRA will treat the original owner as still being the “beneficial” owner unless they actually gave up control, reported a capital gain, and filed things properly.

So even if a parent adds children(s) names to the deed (or gifts it to them for a dollar), it doesn’t necessarily mean that ownership (as defined by the CRA) was transferred correctly. If a capital gain wasn’t reported to the CRA and the parent continues to inhabit the property, maintain the grounds, pay the tax + insurance + electricity bills, then it’s quite likely the CRA is going to say the property always fully belonged to the parent, and it will be looked at that way on the estate when the parent passes.

The property will definitely still go through probate (much to the chagrin of many cabin owners that were told otherwise). It can also end up in a situation where the CRA may assess a double taxation scenario due to confusion about what the fair market value was at the time of the “gift” (when the names were added to the deed) and what the fair market value was at the time the parent passed away.

Can I Sell the Cottage to My Children Before I Pass Away for Maximum Tax Efficiency?

If you want to pass on the family cabin without leaving a massive tax bomb for your estate, you may be tempted to explore the idea of selling the cottage to your children before you pass away.

This approach can substantially reduce the total capital gains tax owed (especially if the parent is in a low tax bracket during a phase of their retirement), but it comes with other tradeoffs. The idea is to trigger the capital gain now, but spread it out over five years using a capital gains reserve, a provision allowed under Canadian tax rules, and also use a promissory note to reduce the amount of money that actually comes out of your children’s pockets.

Here’s how it works (when done properly):

• You sell the cottage to your kids at full fair market value.

• Your kids use the cottage and pay the utility bills, taxes, insurance, etc (proving some degree of beneficial ownership).

• They pay you some cash upfront (enough to support that it’s a real transaction).

• The rest of the purchase price is documented with a promissory note.

• You then use the capital gains reserve to claim 20% of the capital gain each year for up to five years.

• By only spreading out that capital gains income over five years, most retirees will pay a much lower average tax rate (perhaps in the 20% range, instead of the top 50%+ bracket).

• To further reduce tax in this scenario, you could time an RRSP contribution (if you’re younger than 71). You could also sell assets with capital losses (a stock portfolio for example) to offset the gain. Because you control the timing of when you take the capital gains on the cottage sale, the full tax-planning buffet of options is available.

• Any unpaid portion of the promissory note could be forgiven in your will.

A promissory note is a formal, legally binding IOU. It’s a document where the buyer (your child) promises to pay you (the seller) a specific amount of money at some point in the future. The promissory note can specify no interest, no regular payments, and can be forgiven in your will.

So in practice, this is a legal way to report a full-value sale (so CRA doesn’t penalize you for lowballing the price), while deferring most of the actual money changing hands – or avoiding it altogether.

This allows you to defer and smooth out the tax bill, rather than triggering one huge gain all at once — often in the same year your estate would have to deal with your RRSPs/RRIFs, OAS clawbacks, and other taxable events.

Pros:

• Probable tax savings as capital gains get realized when you want them to (and over a period of five years) as opposed to all at once in the year your estate gets settled.

• You will eliminate probate fees. The cottage is no longer part of your estate, so it avoids probate in provinces like Ontario or B.C. where probate fees can be significant.

• Clarity and control. Your kids know where things stand. There’s no ambiguity in the will, and you’re the one driving the process while alive.

• Emotional reward. You get to see your children enjoy the cottage while you’re still around.

Cons to Consider Carefully:

• You must pay the tax bill now. Even if it’s spread out over five years, you’re still going to owe the CRA something. That means less cash on hand or drawing from your investments.

• You’re giving up ownership and control. The property is no longer yours. If your kids make different decisions (or experience divorce, lawsuits, or financial issues) the property could be at risk.

• You still need proper legal paperwork. Expect to pay legal fees to draft the sale documents and promissory note. You may even need separate lawyers for you and your kids as you’ll be on opposite “sides” of this transaction. You’ll also want an appraisal for CRA purposes.

• The promissory note can sometimes be considered “a grey zone.” If it’s too informal, it may not hold up in court or with CRA scrutiny. On the other hand, charging interest on the loan creates taxable income for the parent.

So… Is a Promissory Note and Sale of the Cottage Worth It?

Most people don’t go this route. Despite the tax advantages, the loss of control and the legal complexity means that many cottage owners simply hold onto their property until death, then let their estate pay the tax.

But for families with strong relationships, clear plans, and the right legal and tax advice, this strategy can reduce total tax, avoid probate, and make sure the cottage stays in the family. It can also just be one less thing that needs sorting out when you pass away – which can be a major consideration for some folks.

The key consideration here is not to confuse this strategy with the “gifting for a dollar” myth identified earlier in this article. Talk to a financial planner and a lawyer who understands the capital gains reserve and promissory note rules in detail.

Putting the Cottage In a Trust to Avoid Taxation

You’ve probably heard about wealthy families using trusts to pass down real estate or other assets in a tax-efficient way. The movies always make it sound so easy. 

In reality, it’s only a solution for a very small niche of family cottage situations.

Once again, the main impetus with putting a cabin in a trust is to avoid probate fees and smooth out the inheritance process for one’s loved ones. 

What Is a Trust: A trust is a legal structure that holds assets on behalf of beneficiaries. There are two types of trusts which are often considered for family cottage succession:

A family trust, which is sometimes used to shift future growth of the property to the next generation. The problem is that when you transfer a cottage into a regular family trust, the CRA treats it as if you’ve sold the property, meaning you’ll pay capital gains tax on all the appreciation up to that point, even if no money changes hands. (See our deemed disposition notes above.)

An alter ego trust (or joint partner trust), which is only available if you’re 65 or older. This kind of trust lets you transfer the property into the trust without triggering tax, and it can help avoid probate when you pass away.

Sounds like something smart rich people do on TV.

So why doesn’t everyone do it?

Because while a trust might make sense in some situations, it comes with real tradeoffs:

1) It’s expensive. Setup costs typically run $5,000–$7,500, and ongoing legal and accounting fees can add another $1,000–$2,000 per year.

2) It’s complex. A trust has to file its own tax returns and follow strict CRA rules. 

3) It doesn’t always save money. Most trusts are taxed at the top personal marginal rate. So if the trust earns income (e.g., if the cottage is rented out), the tax bill might be higher than if you just owned it personally.

4) It has a shelf life. CRA rules require trusts to pretend-sell all assets every 21 years (a “deemed disposition”), triggering capital gains tax whether or not the property is actually sold.

So while trusts are sometimes useful for high-net-worth families or unique planning situations, they’re often overkill for a typical Canadian family just trying to pass on the family cottage.

Some people consider trusts mainly to skip probate, particularly in provinces like Ontario, where probate fees are higher (about 1.5% of estate value). That’s where alter ego or joint partner trusts can help. These trusts don’t trigger tax when you transfer the cottage into them, and they can let your family skip probate when the time comes.

Another aspect of using a trust is that they can be structured to prevent negative life events (such as a divorce) from directly impacting ownership of the cottage (unlike if the cottage were simply directly sold to a couple’s children).

But again, you have to weigh the tradeoffs. If you’re looking at a million dollar cottage, skipping probate would save about $14,000 in fees. But setting up and running the trust is likely to cost more than that over the medium- and long-term.

Trusts might sound appealing (and they do make sense in certain situations) but for most families, the cost and complexity just aren’t worth it. You’re often better off keeping the cottage in your own name, documenting any capital improvements to boost your adjusted cost base, and doing some basic estate planning to make sure your wishes are clear.

What About the Non-Tax Considerations of Inheriting a Cottage?

When we talk about passing on a cottage to the next generation, most of the attention naturally goes to taxes, capital gains, probate fees, trusts, etc. 

But the emotional and logistical stuff can be even trickier to navigate. After talking to several dozen family succession cases, the one through line is that you’re better off having semi-awkward conversations early in the game. The last thing you want to be doing when your parent passes away is discussing this potentially explosive emotion-bomb for the first time.

It needs to be emphasized that co-owning physical property with other people (be they family or otherwise) is a complicated endeavor that is bound to be difficult to navigate. It just is – there isn’t really a way around this.

It could very well be that the inevitable headaches are a price worth paying for the ability to keep such an important repository of memories within the family – but the fact that co-owning property with siblings is rarely easy should not be overlooked in the sober early discussions. Co-owning a cottage is almost like entering a business partnership – the “business” being the management of the cottage. Siblings who get along now might find that sharing a property (and its expenses) tests their relationship.

Here are some important non-tax considerations to think through, and hopefully discuss well in advance of the actual transitioning of the property from parents to children.

1) Do All the Kids Even Want the Cottage?

It sounds obvious, but ask: Do your children actually want to inherit and co-own the cottage?

In some families, the answer is a resounding YES – everyone loves the place and wants to keep it in the family. In others, one child may be emotionally attached while another sees it as a burden (or would prefer cash). And then there could be someone who lives out of province or simply doesn’t use it much – should they have to pay an equal share of expenses?

If you leave the cottage equally to multiple children, and they’re not on the same page, you could be setting them up for years of stress, resentment, or even legal battles. 

2) Agreeing On How to Manage a Cottage Isn’t Easy.

Even if everyone loves the place, co-owning real estate is never simple. Who pays for upkeep, taxes, or repairs? Who gets which weeks in the summer? What happens if one child wants to sell but the others don’t?

Unless expectations are clearly documented, these issues can create major conflict down the road. If you’re planning to leave the cottage to multiple children, strongly consider having them sign a co-ownership agreement. This can outline everything from:

• Who pays what
• How decisions are made (unanimous? majority?)
• Rules for rentals, renovations, or selling shares
• What happens if someone wants out or can’t afford their share

Yes, it can feel overly formal, but it’s a lot easier to sort out now than when emotions are running high later.

3) Don’t Rely on an “Unspoken Understanding”

We’ve seen it too many times: a parent assumes the kids will “just work it out” or that “they all get along.” But the fact is that death changes family dynamics. People’s financial situations change. Spouses and in-laws get involved. And grief does strange things to people’s sense of empathy.

Being vague in your will, or casually naming a single child as executor or property manager without spelling out expectations, can lead to confusion or perceived unfairness. If you want one child to inherit the cottage but intend to “equalize” with the others using investments or life insurance, make that clear in your will and in writing to your heirs.

4) Watch Out for Marriages, Divorces, and Lawsuits

Once your kids own the cottage (or even just a share of it), that ownership is vulnerable to whatever happens in their personal lives. A divorce, for example, could trigger a division of property that includes part of the cottage. A lawsuit or creditor issue could place a lien on the asset.

There are ways to reduce these risks (e.g. trusts, co-ownership agreements with protections, or having spouses waive claims in writing), but the risks don’t disappear on their own. Make sure your children understand what they’re signing up for, and that you’ve thought through how to protect the cottage and their relationships. While having a conversation about future potential marital issues isn’t a great way to kick off a long weekend, it’s undeniable that it is a somewhat likely occurrence if several siblings and their spouses are going to co-own a property together.

5) Is the Cottage Affordable for the Next Generation?

Owning a cottage isn’t cheap. Property taxes, utilities, insurance, repairs, dock maintenance, septic systems, it all adds up fast. If your kids are still early in their careers, or raising families of their own, they may not be financially ready to take on shared ownership.

One option is to leave behind a small fund earmarked for maintenance and expenses. Another is to sell the cottage while you’re alive and help fund a future family vacation home that better suits everyone’s needs. In some cases, selling it altogether and splitting the proceeds may lead to less drama and more flexibility for everyone. It might be hard to have one last party and say goodbye – but it may very well be the path that leads to the most collective benefit for the family (and there should be no pain or embarrassment when considering that option).

Jason Heath has written extensively on succession planning for family cottages and has an interesting way of framing the discussion: “Unless you plan to use the property, ask yourself whether you would buy it with an equivalent amount of cash.” In other words, if you were handed half a million dollars today, would your first choice be to purchase a family cottage – or to be more precise, half of a family cottage along with your sibling’s family?

If the answer is yes, great. If it’s not – well then you know that while it might be a hard decision, it’s probably not a great value for you and your loved ones right?

Using Life Insurance to Pay Capital Gains on a Cottage Inheritance

Some advisors out there will tell you that using a life insurance policy is a good tool to use when transitioning a family cottage between generations. 

The pitch usually goes like this: you buy a policy, the payout covers the capital gains tax when you pass away, and your kids get to keep the cottage without selling anything. On the surface, that can sound like a neat solution.

But there are many reasons that I’m not a big fan of life insurance. I’m even less of a fan of life insurance for older people (who have to pay higher premiums). You read a thorough take on my life insurance thoughts here.

The main problem is that life insurance is an expensive and often unnecessary way to solve the cottage capital gains problem. You are paying premiums for many years, and often at a very high cost if you choose permanent coverage. That money could instead be invested in a simple Canadian online brokerage account that would likely grow enough to cover the future tax bill while leaving you in control of your assets.

Just take the money you would have paid as a premium, and put it in a high-interest savings account or another investment. It’s much more simple and will allow you to keep full control of your financial assets. If you were to pass away sooner rather than later, the insurance policy would have been a good buy – but that’s a massive tradeoff (and in that situation you’re not really enjoying the benefits anyway).

Life insurance also tends to be pushed as a one-size-fits-all answer. In reality, most families have other options that are simpler and more flexible. Selling part of the cottage to your children over time, using the capital gains reserve, planning ahead for liquidity in the estate, or even deciding to sell the property altogether, are all possibilities that can be tailored to your situation. These approaches do not require handing over thousands of dollars in premiums to an insurance company.

Another issue is that many of the policies marketed for estate planning are whole life or universal life products that come with investment components. These are notoriously poor investment vehicles compared to low-cost index funds (like those found on our Best ETFs in Canada list). Once you factor in fees and limited transparency, they are rarely a good idea.

Life insurance is also not a magic wand for family conflict. Even if the policy pays out enough to cover the tax bill, you still need to deal with issues like who will use the cottage, how expenses will be shared, and whether everyone actually wants to keep it. 

For the vast majority of families, a better plan is to address the tax implications directly, invest your money efficiently, and communicate early and often with the next generation about what will happen to the property.

Final Thoughts on Inheriting a Cottage or Cabin in Canada

Inheriting a cottage in Canada can be a rewarding gift, but it often comes with complex tax rules, legal considerations, and family discussions. By starting the planning process early, understanding your capital gains obligations, and choosing the right transfer method – whether that is keeping the property, selling to family, or selling outright – you can protect both your wealth and your family relationships.

Because of all the variables involved, there is no single right answer when it comes to passing on a cottage or cabin to your children (or other loved ones).

There is a wrong answer however – and that’s the idea of trying to get out of probate taxes or capital gains taxes by gifting the cabin for a dollar, or just adding the names of your children to the property title. 

The common thread in every good cabin succession plan is that it is put in place WAY before it is needed. That means talking openly with your family long before a sale or inheritance is triggered. It means running the numbers on capital gains, understanding the impact of different transfer options, and making sure everyone knows where they stand.

For some families, the best path will be to keep the cottage in the family for decades to come. For others, selling to an outside buyer or making a clean break might be the right move. Either way, the goal should be to make the decision deliberately, rather than leaving it to be sorted out under the stress of illness or after a death.

Common Questions About Inheriting a Cottage in Canada