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Passing Down the Cottage

How to keep the cottage in the family

It’s one of those perfect days at the cottage—the summertime retreat has been in your family for years. You are sitting on the dock in your favourite deck chair with a cool refreshing drink and a bestseller to read. The sky is clear and the gentle breeze keeps the heat from the sun at bay. It doesn’t get any better than this. You love the cottage and hope it will stay in your family for generations to come.

But will it? Has your cottage appreciated in value? Will your estate be able to cover the tax liability? The primary concern about transferring the cottage to the next generation is the capital gains tax due when the cottage is sold or inherited. You can defer the payment with a spousal rollover upon your death. However, at your spouse's death the Canada Revenue Agency will want to be paid.

It’s one of those perfect days at the cottage—the summertime retreat has been in your family for years. You are sitting on the dock in your favourite deck chair with a cool refreshing drink and a bestseller to read. The sky is clear and the gentle breeze keeps the heat from the sun at bay. It doesn’t get any better than this. You love the cottage and hope it will stay in your family for generations to come.


Before Insurance Planning
Current Value $450,000
Adjusted Cost Base* $50,000
Capital Gain $400,000
Taxable amount $200,000
(50% of total capital gain)
Estate’s total tax liability $100,000
($200,000 @ 50% tax rate)
After Insurance Planning
Current Value $450,000
Adjusted Cost Base* $50,000
Capital Gain $400,000
Taxable amount $200,000
(50% of total capital gain)
Estate’s total tax liability $100,000
($200,000 @ 50% tax rate)
Insurance death benefit proceeds $100,000
*Initial purchase price

The end result: Parents or grandparents will now have peace of mind in knowing that they have not left their heirs with a looming tax liability. The tax can be paid using the proceeds from the life insurance policy. The cottage will be passed on as they had intended. Keeping the cottage in the family requires some careful pre-planning. All too often, families are discovering that the tax owing is so high that they end up having to sell the cottage in order to pay the tax. Happily, there are other ways to fund the capital gains tax liability.

1. Pay the tax now. You can choose to trigger the capital gain now by transferring the cottage to a family trust. Your family will have to pay the tax on any future gains in value (trust rules stipulate that property held in a trust is deemed to be disposed of every 21 years).

2. Set aside the funds to pay the tax later. Estimate the potential gain in value and establish a fund where you and/or your heirs deposit money to cover the future tax liability.

3. Use a life insurance policy. The tax-free death benefit proceeds can be used to pay off the capital gains taxes due. If you have a spouse you may be able to reduce the costs of insurance by purchasing a joint second-to-die policy. The insurance pays out on the second death which is when the money is needed. The use of life insurance may result in the preservation of assets which otherwise may have required liquidation.