Benjamin Franklin once said, "There are only two certainties in life: death and taxes". For Canadian cabin owners, these certainties collide in a particularly poignant way. That idyllic family cabin, home to decades of memories, might just come with a tax bill large enough to force it out of the family.
As Canada experiences what experts call the Great Wealth Transfer, Baby Boomers across the country are preparing to pass on recreational properties to their children. At the same time, families are discovering that inheriting paradise isn't always the gift it seems to be.
Inheritance Tax? Not in Canada.
In Canada, there is no inheritance tax. You don't have to pay taxes on money you inherit, and you don't have to report it as income.
However, when someone dies, the Canada Revenue Agency treats all their assets as if they were sold at fair market value the day before death. This "deemed disposition" triggers capital gains tax that must be paid by the estate before any property transfers to beneficiaries.
Capital gains tax means that inherited cabins will also come with a massive tax bill you'll have to pay in order to keep the property.
Let's work with a typical scenario that many Canadian families face.
The "Smith" Cottage:
- Original purchase price (1985): $75,000
- Current fair market value (2025): $500,000
- Capital gain: $425,000
- Taxable capital gain (at 50% inclusion rate): $212,500
- Estimated tax owing (at highest marginal rates): ~$100,000
This tax bill of $100,000 must be paid by the estate before the cottage can transfer to the next generation. If the estate lacks liquid assets, the executor may be forced to sell the cottage to pay the CRA.
Four Ways to Transfer Your Cottage
Financial institutions and estate planners typically recommend four main strategies for cottage succession - most avoid a forced sale at death to pay the tax bill. Let's examine how each would work with our example cottage.
Option 1: Leave The Cottage in Your Will
This is the default scenario if you take no special planning steps.
At Death:
- Capital gains realized: $425,000
- Taxable amount: $212,500
- Tax payable by estate: ~$100,000
Advantages: You maintain full control and use of the cottage during your lifetime. The strategy is simple and requires no immediate cash outlay.
Disadvantages: The estate must pay the full tax bill before distributing the cottage. Without sufficient liquid assets in the estate, the executor may be forced to sell the cottage. The property also goes through probate, adding time, cost (approximately $7,500 in Ontario for a $500,000 property), and lack of privacy.
Option 2: Gift The Cottage While You Are Alive
If you gift the cottage to anyone other than your spouse, you trigger an immediate deemed disposition at fair market value. Here's how the numbers work:
Immediate Impact:
- Capital gains realized now: $425,000
- Taxable amount: $212,500
- Tax payable by parents: ~$100,000
Advantages: By gifting now, you cap the tax liability at today's value. If the cottage appreciates to $750,000 over the next decade, your children's future cost base starts at $500,000, not $75,000. This could save the next generation $125,000 or more in future taxes.
Disadvantages: You need $100,000 in liquid assets to pay the tax bill immediately. You also lose control of the property and can't guarantee you'll be welcome as a guest - though hopefully this wouldn't be the case. If your child divorces, the cottage could become part of matrimonial property division.
Option 3: Make Your Beneficiary a Joint Owner
Adding your child as a joint tenant can seem like an elegant solution, but it comes with complexities.
Immediate Impact:
- Deemed disposition of 50%: $212,500 capital gain
- Taxable amount: $106,250
- Tax payable now: ~$50,000
At Death:
- Remaining 50% transfers automatically
- Additional capital gain: $212,500
- Tax payable by estate: ~$50,000
Advantages: The property bypasses probate, saving time and fees. You spread the tax burden over two events rather than one large hit. The surviving joint owner receives the property automatically.
Disadvantages: You immediately trigger tax on half the property. You lose sole control, and your child becomes a legal co-owner who must agree to any sale or mortgage. The property could be exposed to your child's creditors or divorce proceedings. The CRA may also require annual trust reporting, adding complexity and cost.
Option 4: Create a Living Trust
For those 65 and older, an alter ego trust or joint partner trust offers a sophisticated planning opportunity.
Setup:
- Transfer cottage to trust at fair market value
- Capital gains realized: $425,000
- Tax payable: ~$100,000
Advantages: The property avoids probate, saving approximately $7,500 in fees and keeping your affairs private. You maintain complete control during your lifetime. The trust can provide detailed instructions for succession and protect against challenges. Assets in the trust may have some creditor protection.
Disadvantages: You still face the same capital gains tax bill upfront. Trust setup requires legal fees ($5,000-$15,000 typically). Annual trust tax returns add ongoing complexity and cost. The strategy is most cost-effective for high-value estates where probate savings and control benefits outweigh the setup costs.
Life Insurance?
While not one of the four transfer methods, life insurance deserves special mention as a complementary strategy. Using our example:
The Insurance Solution:
- Estimated tax liability: $100,000
- Joint last-to-die policy death benefit: $100,000
- Annual premium (age 65, healthy): ~$2,500
Over 20 years, you'd pay $50,000 in premiums to provide $100,000 tax-free to your estate. This ensures the cottage doesn't need to be sold to pay taxes. The math works particularly well for younger, healthy cottage owners who can lock in lower premiums.
Beyond the Tax Bill
Even after successfully navigating the tax hurdles, cottage ownership brings substantial ongoing costs. Financial experts recommend budgeting 1% of the property's value annually for maintenance. For our $500,000 cottage, that's $5,000 per year - but that's just the beginning.
Property taxes in cottage country routinely run $2,000-$5,000 annually. Insurance for seasonal properties adds another $2,000-$3,000. Utilities, even for seasonal use, can total $3,000-$5,000 when you factor in electricity, propane, and septic maintenance. If your cottage sits on a private road, budget for annual road fees. Don't forget seasonal costs and the inevitable surprise repairs.
All told, expect $15,000-$20,000 in annual carrying costs for a typical $500,000 cottage. Over 20 years, that's $300,000-$400,000 just to maintain the status quo, not including major renovations or replacements.
Making the Decision
According to RE/MAX's 2025 Canadian Cabin & Cottage Trends Report, 17% of cottage owners report the next generation isn't interested in taking over the property. Another 17% plan to put the family cottage on the market as a result of an estate decision. Clearly, there are complex financial and emotional calculations families must make.
The key questions to ask yourself:
Can you afford the immediate tax implications? Whether through liquid assets, insurance, or careful planning, you need a strategy to handle the capital gains tax without forcing a sale.
Can you sustain the ongoing costs? Annual expenses of $15,000-$20,000 can strain retirement budgets and compromise other financial goals.
Do all family members agree? Shared ownership among siblings with different financial capabilities and visions for the property often leads to conflict.
Is this the best use of your inheritance? Sometimes selling the cottage and investing the proceeds provides greater financial security and flexibility.
Planning for Paradise
Death and taxes may be life's only certainties, but with proper planning, they don't have to mean the death of your family's cottage legacy. The key is starting the conversation early and honestly assessing both the financial and emotional aspects of cottage succession.
Consult with tax professionals who can model the exact implications for your situation. Work with estate lawyers who understand cottage succession strategies. Consider meeting with insurance advisors if that solution fits your circumstances. Most importantly, have frank family discussions about everyone's vision for the cottage and their financial capacity to support it.
There's no shame in deciding the cottage is too expensive to keep. Sometimes the most loving decision is to sell the property and preserve both family harmony and financial security. Other times, with careful planning and shared commitment, families successfully pass their slice of paradise to the next generation.
The cabin that has hosted decades of family memories deserves a future planned with both the heart and the head. Make an informed decision that honors the past while protecting your family's future.
Tax laws and regulations change frequently and vary based on jurisdiction. This article reflects general principles in Canada as of 2025. The examples provided are simplified for illustration. Always consult with qualified tax and legal professionals for advice specific to your situation.
Join the Conversation