Inheriting the family cottageInheriting the family cottage may not be as simple as getting the keys after mom and dad pass away.

The cottage is a source of joy, which is why many Canadians consider leaving it to their children so that it can be enjoyed by future generations. However in Canada, if you are in this situation, or considering purchasing a cottage for the first time, there are certain tax implications you may want to consider.

It’s common practice in Canada for parents or grandparents to leave their home or cottage to a child or grandchild. It’s also common practice for the taxman to expect a share of the transfer proceeds, as the value of the property has now transferred from one owner to another.

When a piece of property is handed down, it may be subject to a capital gain tax if the property was not a principal residence.

That means if you inherit your parent’s cottage — a vacation home that is not designated as a principal residence — then the transfer of ownership would be subject to tax. This tax is calculated as if the cottage had been sold at a fair market value.

The good news is that under Canadian tax law, the taxes on this transferred cottage property are owed by your parent’s estate, and not by the person inheriting the family cottage.

The sad news is that if the estate is cash-poor and property rich, you might find yourself taking out a loan or selling assets in order to come up with the taxes owing.

Inheriting the family cottage
The key to cottage succession is to have perspective. The cottage is a thing. It is the place where wonderful memories were made, but life goes on. Often trying to keep those memories alive at the expense of logic can have tremendous negative financial and emotional consequences for the inheriting family member(s).

The Canadian 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.

Canada TaxMy general recommendation is to keep it simple. Use a Will to give or hand down the cottage to the children. Period.  Let them work out their problems when the parents are no longer involved.

There are numerous ways to try to manage the capital gain tax upon the assignment, sale or transfer of a cottage property.  Some are more complex than others.

Have you inherited or sold a family cottage?

How did you deal with the capital gain?