What Happens to the Family Cottage? 7 Things to Consider Before You Decide

For many Canadian families, the cottage is more than a property. It's where summers have been spent, traditions have been built and generations of family memories have been made.

That emotional connection can also make it one of the more difficult assets to plan for.

Parents may assume their children will want to keep the cottage. Children may love spending time there but feel differently about owning it. Siblings may have very different financial situations, lifestyles and ideas about how the property should be used.

Before deciding what should eventually happen to the family cottage, there are several conversations worth having.

1. Do your children actually want the cottage?

This may be the most important question, and one of the easiest to overlook.

Enjoying weekends at the cottage isn't the same as wanting the responsibility of owning it.

Ask your children individually what they envision. One may want to keep it in the family, another may live too far away to use it regularly and another may prefer to receive a different part of the estate.

Knowing what everyone actually wants can make the financial planning much more productive.

2. Could shared ownership realistically work?

Leaving the cottage equally to three children may look fair on paper, but equal ownership doesn't necessarily mean an easy arrangement.

Families may need to consider questions such as:

• Who pays for repairs and renovations?

• How are property taxes, insurance and utilities divided?

• How is cottage time allocated?

• Can an owner rent out their share or invite guests?

• What happens if one sibling wants to sell?

• Could one sibling eventually buy another out?

These may seem like details today, but they can become significant issues once ownership changes.

3. Understand the potential tax implications

A cottage that has increased substantially in value may also come with a significant unrealized capital gain.

For Canadian tax purposes, a cottage may qualify to be designated as a principal residence for certain years if the applicable requirements are met. However, a family generally cannot designate both its primary home and cottage as its principal residence for the same year.

That means deciding which property receives the principal residence exemption can become an important part of the overall tax strategy.

The tax consequences will depend on your circumstances, including when the property was purchased, its adjusted cost base, how it has been used and how much it has appreciated.

4. Keep good records

If you've owned a cottage for decades, finding receipts for improvements made years ago may not be easy.

Keeping records of the original purchase and eligible capital improvements can be important when eventually determining the property's adjusted cost base and calculating a capital gain.

If you're planning a major cottage renovation this year, keeping the paperwork may matter many years from now.

5. Think beyond simply “leaving it to the kids”

There are different ways a cottage may eventually change hands.

Some families may leave it through their estate. Others may consider transferring or selling it during their lifetime. In some situations, one child may ultimately purchase the interests of other family members.

Each option can have different tax, legal and financial consequences.

Before transferring ownership, it's worth understanding not only who will receive the cottage, but what that transfer could mean for everyone involved.

6. Consider what “fair” means for your family

Suppose one child receives the cottage while another receives investments of the same value.

On paper, the inheritance may look equal.

In practice, the child receiving the cottage is also taking on property taxes, insurance, maintenance, repairs and potentially a less liquid asset.

Alternatively, if several children inherit the cottage together, one may use it considerably more than the others.

Estate equalization doesn't always mean dividing every asset equally. The goal is to find an approach that makes sense for your family and reflects what each person actually wants.

7. Plan for the cost of your decision

Whatever you decide, consider how the associated costs will be covered.

Will your estate have sufficient liquidity to deal with taxes and other obligations without having to sell the cottage? If one child wants to keep the property, would they be financially able to buy out their siblings? Could insurance have a role in providing additional estate liquidity?

These are questions worth exploring as part of your broader financial and estate planning.

Start with the conversation

You don't need to decide the future of the cottage over one family dinner.

But you do need to know what everyone is thinking.

Ask your children whether they see the cottage as part of their future. Talk about what ownership would actually involve. Discuss what would feel fair if some children want the property and others don't.

Once you understand what your family wants, your financial advisor, accountant and lawyer can work with you to explore the financial, tax and legal implications and put the appropriate plans in place.

The cottage may hold decades of family history. Having these conversations now can provide greater clarity about what you want its next chapter to look like.

Happy cottaging. - Barry Fowler

This article is provided for general information only. Cottage and estate planning decisions can have financial, tax and legal implications that vary based on individual circumstances. Financial planning should be coordinated with appropriate tax and legal advice where required.