The Cottage as a Legacy

Gifting the Cottage to Children – is NOT a Free Gift

When you think of your family cottage you don't think of it as a building, property or asset, but the birthplace of a kaleidoscope of memories. Whether you toiled with pride to build or renovate the cottage or not; one thing is almost always a constant, the fond memories its existence created. These memories are usually universal and soul piercing.

The cottage time is the virtual memory of the evolution of your family. The fondness with which your children share these memories are usually evident and viewed as "wonderful" times.


    • The May two-four weekend; usually starts the cottage season. May 24 is a date, not a quantity of beer; although often interchanged. The list of memories are endless.
    • Jake catches his first sunfish.
    • The bonding with John, while building a Seaflea.
    • Sara freaks at a garter snake.
    • The annual corn or pig roast that reunites family and friends.

The romantic autumn weekend getaway for just the two of you, with the calling of the loon; the sunset across the lake, the cozy fireside, bottle of wine... well you, better than anyone know the rest.

If you really think about it, the acquisition of the cottage was motivated by a desire to lay a foundation for building those memories. When you started out, if at all, you never thought of the cottage merely as an investment. For most it has become the catalyst for one of the "legacies of your family's life". Let me repeat that. "The Cottage represents a Legacy of your Family's life."

The question is, will the legacy endure? Sure, while you are around to nurture the memories; but what about after. It is important not confuse the cottage with the legacy. The cottage and the legacy is not the same. The cottage helped create the legacy. The legacy is the kaleidoscope of memories and the bonding of family and friends. If you keep these concepts in perspective the cottage has the potential to be a catalyst to protect the existing legacy and perhaps create a new legacy. This is so important, let me repeat.

The question is, will the legacy endure? Sure, while you are around to nurture the memories; but what about after. It is important not confuse the cottage with the legacy. The cottage and the legacy is not the same. The cottage helped create the legacy. The legacy is the kaleidoscope of memories and the bonding of family and friends. If you keep these concepts in perspective the cottage has the potential to be a catalyst to protect the existing legacy and perhaps create a new legacy. This is so important, let me repeat.


The cottage is NOT the legacy. The cottage was the catalyst that created the "Legacy of your Family's Life. In the absence of other forces, while the cottage may not last, the legacy will endure during the rest of your life, and probably beyond.

After that, the cottage has the potential to be a catalyst to perpetuate the legacy and perhaps create new ones, depending on how you deal with it. The real danger is that if the issue of cottage succession isn't dealt with in an efficient and most importantly an effective manner, the legacy that the last number of decades saw formulate will be not only jeopardized but can be shattered needlessly.

It's easier to explain via examples created by real circumstances. If we deal with one or two you can translate their consequences to your own family situation. For the purpose of illustration, we will assume the following. Your intention is to have the family cottage to transition to your kids, grandkids and so on. Your hope is that your kids and grandkids will have similar experiences to build their own "kaleidoscope of memories and build the same bond within their families as you have. You have 3 children, John Jake and Sara.

    • John is married has a successful business, with one child on the way;
    • Jake is single and off somewhere finding himself and
    • Sara is in her 3rd year of college living on campus 1000 miles away; visits you and the cottage every opportunity between semesters. She has a serious relationship with boyfriend, Hanz working full time as merchant mariner. Sara loves the cottage.
    • There is a variable level of closeness among the children but generally, they like and get along with one another.

Your cottage property is located in a very desirable location which you built from scratch over many weekends since you acquired the property back in 1969 and has nicely grown in value to $450,000 representing an annual appreciation of 5.65%. The total capital gain is currently is $400,000.

You are 60 and your wife is 58 and you are seriously contemplating retirement to spend more time at the cottage as the kids are now nearly independent and out of the nest sort of speak.

Your life expectancy stats says you will be enjoying the cottage for another 20 to 22 years making the then fair market value of the cottage $1.5 million dollars assuming the same 5.65% growth rate, giving a Capital gain of $1.45 million. Your current Will expresses your wishes and says, the cottage will go the three children in equal shares. You are being fair, and equitable, which is the way most want to treat their children. When you said "...go to the 3 children", you just assumed the cottage will be kept and used by the kids, right?

Keeping in mind the "legacy" the cottage created, here are possible realities that can shake that legacy.

We will call these Legacy Challenges:

Now let's look at possible scenarios with respect to the cottage succession. Let's assume all you do is stipulate in your will that the surviving spouse and after his/her death the children are to get the cottage in equal shares. The state of affairs upon succession to the children is as follows:

    • The Fair market Value of Cottage - $1,500,000 - providing each child with a gross equity in the cottage of $500,000.
    • Capital Gains Tax Liability - is triggered immediately. Using the above assumptions the tax liability to the estate is $333,000, (For this illustration we assumed $0 of ACB)
    • There are estate settlement cost relevant to the cottage of $22,000+ for taxes and fees; $15 to $20 thousand for executor and legal fees.

So the children have a cottage worth $1,500,000 and a capital gains tax liability to the government of $333,000 and another $50,000 or so for legal and executor fees. This would leave a net equity share for each child in the cottage of about $370,000 after the debts are paid.

If the intention is to have the children keep the cottage.

    • Where are the funds coming from to pay the debt or some $384,000?
    • Do the kids have the cash available?
    • Do they have equal credit worthiness to borrow the funds?
    • Do all three wish to keep the cottage, or
    • would one or more of them wish to have a net cash equity rather than a debt load?
    • Do you want any portion of the cottage to go to a spouse of one of your children?
    • Is there a choice?

On the other hand...

    1. John's Situation: We know that John already has his own cottage and would rather get the net cash equity.
    2. Jake is located on the coast is not likely get any use out of the cottage due to his location and would probably like a cash equity over a debt load.
    3. Sara would love the cottage, but can't see coming up with $736,000 to pay the debt liabilities and buy out the brothers. Then there is the issue of "Butch" the resident freeloader. He may have legal rights to a share of the cottage if Sara becomes a benefactor.

But these are just the tangible financial numbers. The real issue is the potential for disharmony among the children that can easily erupt over the resolution of the cottage, which is exactly the opposite to the intention by gifting the cottage. This potential for disharmony is far greater an issue than the math or the specific numbers. This potential for disharmony exists in various degrees regardless of how you plan to solve the financial hurdles of succession. In the simplest terms the financial hurdles always revolve around the need to have cash to pay debts, buy out other benefactors etc.

Cottage delima

We will try to address some methods of succession strategy. Detailed discussion of any strategy is beyond the scope of this article but we will highlight then against the backdrop of the consequences of each strategy. In selecting one strategy over another, one of the important consideration is the personalities of your children and their likely adaptation to and consequential interaction with their siblings, given the strategy chosen. Be aware of

    • your children's personalities and
    • their historical interpersonal relationship.

Leaving decisions to their own devices may very well destroy the very "legacy of your family life" the cottage created. Here are some strategies:

  • Passing the cottage on to the kids while you are still alive. - There are financial consequences as Capital Gains tax liability is triggered; and other costs emerge. You also lose control of the asset, partially or in total.
  • Fractional ownership - If financial considerations of accepting the succession can be sorted out, and if all want the cottage; all live within close proximity of the cottage; all problems are not solved. Time sharing its use; the seasonal chore of who opens and closes the cottage are all potentials for discourse. The most trivial issues are often the most contentious. Leaving a mess for the next visitor, or agreeing on what is or isn't a mess; painting the cottage a psychedelic color can blow into unsustainable arrangements. Management companies can eliminate some of these issues but come with a cost.

If all want the cottage and financial liabilities are at issue, loans or liquidation of other assets may become options.

  • Placing Cottage into a Trust - Can delay the capital gains tax liability but eventually the issue returns. The fractional ownership issues still exist with its potential consequences.
  • Life Insurance to Create Cash when it's needed. - Sufficient life insurance can create necessary cash just when it is needed.

Let's look at Life insurance a little closer. Why life insurance? The benefit becomes payable just when the liabilities of the succession become an involuntary reality, at death. Some of the virtues of life insurance are:

    • Death proceeds of a life policy are tax free.
    • Life insurance is an asset like any other asset but without the tax, so it doesn't impact on the size of your estate for tax computation purposes.
    • Proceeds can be paid directly and confidentially to a designated beneficiary outside a will.
    • The payment is not subject to public scrutiny, or delays often associated with probating or challenging of a will.
    • The asset is purchased, and the cost is age, health and gender dependent. The younger, and healthier, the insured, the cheaper the cost of the asset. Often the need for life insurance begins at an early age, like the 20's as mortgage insurance or protecting the family income while raising children. Later in life the need may well still be there, just for different reasons, like cottage succession financing. So some of the life insurance could be some of this early purchased life contract no longer needed for family or mortgage protection; and some can be purchased at older ages.
    • The mathematics through a cost benefit analysis can establish if life insurance makes financial sense. Your analysis of the children's circumstances and the interpersonal relationship amongst them will determine the virtue of the utilization of life insurance over alternatives.

Your advisor, may be in a position to walk you through the process. If you don't have one, we can help you, We have kids, we have come across many situations and helped many struggle through the process.

The key to cottage succession is to have perspective. The cottage is a thing. It was a catalyst for the wonderful memories, but life goes on. Often trying to perpetuate a notion at the expense of logic can have tremendous negative consequences for the kids, financially and emotionally. When you have three vibrant children, some with spouses of their own, all wishing to emulate the success of the family life you fostered for them, its not hard to imagine that they may not see the same picture of the cottage on a go forward basis as you are trying to hold on to. So to maximize the options at succession time and to minimize the chance for discourse, it is most prudent to have as much ready cash as possible to deal with the financial hurdles to a smooth succession process. ~

The reality is that Canadian tax system taxes the growth in value of real estate. While the principal residence is exempt from capital gains tax in Canada  As such secondary property within a family unit attracts capital gains tax in Canada. Canada inheritance tax and Canada estate tax have been abolished but was replaced by the Canada Capital Gains Tax.

Succession planning addresses not only the financial consequences of succession but the real human emotional and psychological well being of the recipients of the gift.

The tax system is complicated. Your situation may be similar to many Canadians, it is probably unique to you and this combination begs for professional counselling on how to not only minimize the impact on your estate but how to effectively structure your affairs to accomplish that goal.

Have you set up your Pre-Paid Capital Gains Tax Account for the cottage and other appreciable assets with Canada Revenue Agency? If not, We can help with a smooth transition that takes into account the human factors as well as the financial practicalities.

If you would like more information, please feel free to get in touch for a free, no obligation

-- and additionally --

Check out the blog on the cottage dilemma, cited in "Capital Gains - On Appreciable Property"~



About the Author