Canada: Estate Planning For The Family Cottage…It's Complicated

Last Updated: December 18 2018
Article by J. Allison Barkwell

Estate planning is not an easy task, as families are complicated.  The general goal of most people when they are estate planning is to create fairness amongst their beneficiaries.  This is easiest to do when cash is being divided.  For example, when all of the assets are sold and the debts, including taxes, are paid, then what is left-over can be easily divided in accordance with the terms of the deceased's Will.

However, if the testator (person making the Will) owns a family cottage that has been in the family for several years, some of the beneficiaries might not want it to be sold and would like to continue using it as they always have. If the Will does not specify what happens to the cottage, the personal representative could suddenly have a beneficiary dispute on his or her hands. The example set out below highlights some of the issues and factors to be taken into consideration when a person's estate includes a family cottage.

Ms. Dobby's Cottage at Voldemort Lake

Ms. Dobby is 70 years old.  She has owned a cottage at Voldemort Lake for the past 40 years.  She purchased the cottage for $150,000 and it is now worth $1,500,000.00.  Ms. Dobby was in a second marriage with Mr. Potter. Mr. Potter passed away two years ago. The two of them had been married for 23 years at the time of his death.  Ms. Dobby has two children from her first marriage, Hermione who is 45 and Draco who is 41.  Mr. Potter had two children from his first marriage, Ginny who is 42 and Albus who is 38.

The entire blended family has been using the cottage for the last 25 years.  Each summer all of the children spend a few weeks there with their own children.  For the past 40 years, Ms. Dobby has been paying all of the operating expenses for the cottage.  Ms. Dobby estimates the cost of operating the cottage on an annual basis is about $40,000.00, and this does not include the cost of any improvements she has made to the property over the last 40 years.

Ms. Dobby has spoken to the family and asked what they would like to happen to the cottage after she passes away.  All of the children have said they would like to continue using it as they are currently using it.

Tax Implications

Upon Ms. Dobby's death, Ms. Dobby is deemed to have sold all of her assets at fair market value.  This includes the cottage at Voldemort Lake.  There has been an increase in value of $1,350,000.00 since Ms. Dobby purchased the cottage, and accordingly, capital gains tax is payable on this increase in value. The tax payable is based on 50% of the increase in value being $675,000.00.  The tax payable on the cottage would be approximately $337,500.00.  This would need to be paid by April 30 of the following year.  Where would this money come from?

Depending on the value of Ms. Dobby's primary residence and how long she has owned that property, there may be an opportunity to designate the cottage as her primary residence and reduce the capital gains tax payable, through the use of the principal residence exemption.

Other Financial Considerations

The cottage is an older property and Ms. Dobby is aware of some improvements that will need to be made over the next few years. This includes a new roof and a new boat dock. In addition, she would like to purchase a new boat as all the grandchildren like wakeboarding and waterskiing. Ms. Dobby is not sure what the cost of these improvements and the boat will be.  If the property is transferred to all of the children equally, how will they decide who pays for the improvements to the property?  How will they decide when the improvements are made?  What if one of the children is unable to pay the costs of the improvements?  These issues can create significant issues between the children if they are unable to agree.

In addition to the improvement costs, how are the annual operating costs to be paid after Ms. Dobby's death? Can each of the children afford to pay a share of the annual operating costs?

Fairness and Other Issues

As this is a second marriage for Ms. Dobby, does she want both her children and Mr. Potter's children to receive equal amounts of her estate?  If she does not leave the cottage to all four children equally, will this cause the children to not get along in the future?  In her Will, does Ms. Dobby give more to her children and less to Mr. Potter's children?  Will this create issues amongst the four children?

What if Albus initially wants a share of the cottage but later moves away?  Would the three other children be able to purchase Albus' share?  How do they determine the fair market value?  Do the other three children need to obtain a mortgage on the property or can they buy-out Albus over a period of time?

During Ms. Dobby's lifetime, she has been arranging the scheduling of the cottage for all of the children and the grandchildren.  How will the scheduling be determined after she has passed away?  What if Draco spends several weeks at the cottage and Ginny is only able to spend a few days there?  Does this change how the operating costs are to be paid?


As you can see, family cottages raise many complex issues that require careful consideration in estate planning.  At Miller Thomson, we have significant experience with estate planning and planning for individuals with secondary properties.  We would be pleased to navigate you through the tax, financial and other considerations and assist in planning to prevent any disputes amongst your beneficiaries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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