Keeping the Cottage in the Family: A Plan for the Next Generation

This time of year, as we celebrate Louis Riel Day and reflect on heritage and family legacy, many Manitobans are also thinking about another kind of legacy: the family cottage.

That cabin at the lake isn’t just a piece of property; it’s where your kids learned to swim, where family gatherings happen every summer, where memories spanning generations live. Naturally, you want to pass it on to your children. But without proper planning, they might be forced to sell it just to pay the tax bill.

The Capital Gains Tax Problem

Here’s what catches families off guard: when you pass away, the CRA treats your cottage as if you sold it at fair market value on the date of your death. If you bought that cabin for $50,000 thirty years ago and it’s now worth $350,000, your estate faces capital gains tax on that $300,000 increase.

For many families, this creates a painful situation. Your kids inherit the cottage, but they also inherit a substantial tax bill—often tens of thousands of dollars—due within months. If they don’t have that cash sitting around (and most don’t), their only option is selling the very place you wanted them to keep.

Why This Happens

Unlike your principal residence, which is exempt from capital gains tax, recreational property doesn’t get this protection. The government considers the appreciation in value as income to your estate, and they want their share. The tax is due before your estate can be settled, which means your executor needs to find the money quickly.

Planning Strategies That Work

The good news? There are ways to help your children keep the cottage without facing financial hardship:

Life Insurance: A life insurance policy with a death benefit equal to the expected tax liability can provide your estate with the cash needed to pay the CRA. Your kids keep the cottage; the insurance pays the tax bill. This is often the simplest and most cost-effective solution.

Transferring Ownership Gradually: In some situations, transferring ownership to your children during your lifetime can spread out the tax impact. However, this strategy has complexities and isn’t right for everyone—it needs to be done carefully with professional guidance.

Joint Ownership Considerations: Adding your children as joint owners might seem simple, but it can trigger immediate tax consequences and create other complications. This approach requires careful analysis.

Start the Conversation Now

Planning for cottage succession isn’t just about taxes; it’s also about having honest family conversations. Do all your children want to keep the cottage? Can they afford the upkeep? Who will make decisions about maintenance and use? These discussions are just as important as the financial planning.

Your cottage represents more than financial value—it’s a tangible connection to your family’s story. With proper planning, you can ensure it remains part of that story for generations to come.

Ready to create a succession plan for your cottage? Call us at (204) 925-1900. We’re here to help preserve what matters most.