Love the Family Cottage? Here are Ways to Keep it in the Family

By Martin Rumack

May 8, 2017

cottage, Cottage Season, family cottage, Muskoka

Cottage season is nearly upon us.  For some families, this means idyllic summers spent in a beloved family cottage full of memories of seasons past, and ripe with the promise of good times to come.

If you are a lucky cottage owner, it’s never too soon to start thinking about handing the family cottage over to the next generation.  Making plans now will not only achieve your express wishes, but it will also ensure there are no disputes over ownership or over the responsibility for paying the expenses, and for property taxes.

Here are some ways you may want to consider, when strategizing on how to hand the cottage down to an adult child:

Transfer Under Your Will.   You can simply leave your family cottage to your child in your Will, to be transferred to him or her after the death of both you and your spouse. However (and assuming your child is not planning to use it as a principal residence), it’s important to recognize that this leaves your child on the hook to pay capital gains tax on the property where the cottage is sold.  Depending on the value of the cottage, that tax obligation could be quite substantial.

Gift While You are Alive.   Another option is to gift the cottage to your adult child while you are alive, and at that time pay the capital gains tax owing.  You may even decide to continue paying the expenses as well as retain the maintenance obligations.  The question of who uses the cottage, and to what extent, will be something that you can all agree to informally. But note:  if your married child uses the cottage extensively to the point where it can be considered a matrimonial home with his or her spouse, upon any subsequent divorce the soon-to-be ex-son/daughter-in-law might make a claim for half its value, depending upon the circumstances.

Using a Legal Trust.   Under a written trust arrangement, the legal ownership of the home (which you would retain) is kept separate from the right to beneficial use and enjoyment of it (which would be a right enjoyed by your child).  This keeps the arrangement tidy while you are alive, and has the added bonus of circumventing any divorce-triggered claims by your adult child’s former spouse in the event they divorce.  The down-side is that under what is known as a “deemed disposition” rule, the law forces the property to be transferred every 21 years, triggering a capital gain tax liability.

These are just a few methods for dealing with the cottage property, and it’s important to get a fuller understanding from an experienced real estate lawyer and financial planner and/or tax lawyer before making any decisions.

Whatever the best solution may be for you, if you want to keep your cottage in the family – whether as part of your childrens’ inheritance or for sentimental reasons, or both – start thinking about it now, so that you do not find yourself in a situation where you are dealing with an urgent situation or under pressure.  In the meantime have a relaxing, enjoyable summer!!!


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