Chris Hanley, CA, CPA, CFP® and Denika Heaton, BBA, JD, TEP
Mawer Tax and Estate Planning Specialists 

Owning a family cottage can be a source of pride and joy, but things can get complicated when it’s time to transfer ownership. Much like the decision for when to transfer, each option for how to transfer has pros and cons. For example, joint ownership can simplify the transfer process, but disagreements over how to use or maintain the property are common. Setting up a trust, meanwhile, can offer a clear structure for managing the cottage according to your wishes, but often comes with added costs and complexity.

It’s important when exploring various ownership structures to understand how each one can potentially impact your family’s situation. To help, we’ve compiled some common options to consider when transferring the family cottage to the next generation. 

Please note the following discussion is general in nature. This type of planning involves nuanced tax and legal considerations, so it’s best to consult your legal counsel for guidance on your particular circumstances.

Joint Ownership

Your children can hold the family cottage as joint owners either through a sale, a gift during your lifetime, or as specified in the terms of your Will after your passing. Legal title to assets can be held either as “tenants in common” or as “joint tenants with rights of survivorship.” Each arrangement has distinct legal implications.

Tenants in common

Each tenant in common (owner) holds an undivided interest in the property. This means that each owner has a specific share of the property, which can be equal or unequal.

Upon the death of a tenant in common, their interest in the property does not automatically transfer to the surviving co-owners; instead, it passes to the deceased's estate and is distributed according to their Will or the laws of intestacy if there is no Will. It would be uncommon for spouses to hold property this way as the property would pass through their estate and be subject to probate costs and delays.  

Joint tenants with rights of survivorship

Joint tenancy means that two or more people own the same property together, where each joint tenant has an identical interest in the property. This means no single owner has the right to exclusive possession or use of the property; instead, each owner shares the property equally. Each owner’s interest is the same as all other owners, so you cannot have different proportional shares with joint tenancy.

The primary feature of joint tenancy is the right of survivorship. When one joint tenant dies, their interest automatically transfers to the surviving joint tenants, enlarging the surviving joint owner’s shares in that asset and bypassing the deceased's estate. This is the most common way for spouses to hold joint property. However, if joint tenancy is used between siblings, this approach could disinherit the deceased owner’s children.

Cottage Co-Ownership Agreements

If you decide to jointly own the family cottage with your children, then a cottage co-ownership agreement should be executed in advance among all owners. Here are some key considerations:

Establish Governance Parameters

Co-ownership agreements can help govern various aspects such as handling expenses, making decisions on improvements, and addressing what happens if a co-owner wants out or passes away.

Determine Likely Use

Consider everyone’s access and intention to use the property (both now and in the future) and develop a plan to maintain fairness.

Set a Schedule

Establish clear agreements on property use, maintenance responsibilities, guest policies, and financial contributions to prevent conflicts and misunderstandings.

Manage Conflict

Implementing conflict resolution mechanisms, such as mediation or a family council, can address disputes and encourage open communication among family members.

Ensure Continuity

Consider including future generations in the ownership and use of the cottage. Setting guidelines for passing down ownership and involving younger family members in maintenance, planning, and decision-making can foster a sense of ownership and secure continuity.

Include Legal Considerations

Ensure your children’s Wills and estate plans reflect the succession plan for the cottage. Draft legal agreements outlining ownership, usage, and maintenance terms to prevent disputes. Seek family law advice to protect the property from spousal claims and other creditors. Matrimonial and spousal rights may override the co-ownership agreement if planning and caution are not exercised.

Trust Structures

A trust is a relationship involving a settlor, trustee(s), and the beneficiaries. The settlor transfers property to the trustee(s) to be held for the benefit of the beneficiaries. A trust can be created during your lifetime (an inter vivos—or living—trust) or upon your passing (a testamentary trust).

A trust can provide control and can help ensure that the settlor’s wishes are followed by the trustees. As well, a trust may help minimize animosity and friction among the beneficiaries.

However, these benefits come with additional costs such as: legal fees to create the trust, as well as the ongoing and often annual tax compliance costs to maintain the trust. Also, when a family cottage is initially transferred to an inter vivos (living) trust, the transferor is generally deemed to have disposed of the property at its fair market value (“FMV”), which may trigger a capital gain.

Other Tax Complications Worth Noting

Holding a family cottage in a corporation can lead to significant tax disadvantages, including the inability to claim the principal residence exemption. Further, if corporate property is made available for personal use, a taxable benefit is conferred on the shareholder(s). Holding property in a corporation also involves additional administrative burdens.

Land transfer tax (“LTT”) issues must be considered when transferring a family cottage to the next generation. The LTT applies to all transfers of land, with specific exemptions and reliefs varying by province. The province in which the cottage is situated would have the authority to levy LTT, which, depending on the province (and in some cases additional levies are also applicable by municipalities), can be very substantial.

Lastly, other considerations like the applicability of the Underused Housing Tax Act or any local vacancy levies could impact ownership structure.

Conclusion

Applying an appropriate ownership structure, such as joint ownership or trusts, and establishing clear agreements to prevent conflicts, is essential to ensuring a smooth and equitable transition of the family cottage.