Keeping the Family Cottage in the Family: Estate Planning for Ontario’s Secondary Properties

Summer in Ontario means cottage season. Weekends quickly fill with time at the lake, barbecues on the dock, and long-standing family traditions. For many Ontarians, the family cottage is more than just real estate. It is a place where memories are built across generations.

While the cottage is often viewed as a family legacy, it can also be one of the most complicated assets to deal with in an estate.

Whether you own a cottage, vacation property, or rental property, passing down a secondary property in Ontario is rarely as simple as leaving it in a Will. Without proper planning, a cherished family asset can create tax issues, administrative challenges, and difficult decisions for the next generation.

Why Cottages and Secondary Properties Require Special Estate Planning

Many people are surprised to learn that Canada does not have an inheritance tax. However, that does not mean assets pass tax-free on death.

In most cases, when someone passes away, the Canada Revenue Agency treats certain assets, including cottages and rental properties, as if they were sold at fair market value immediately before death. This is known as a deemed disposition. If the property has increased in value over time, that increase may result in a capital gains tax liability for the estate.

For families who purchased a cottage decades ago, the impact of this rule can be significant. A property that was once modest in value may now be worth substantially more, which can translate into a large tax bill that must be paid before the property can be transferred to beneficiaries.

However, there are some exceptions. In certain cases, assets left to a spouse or common-law partner can transfer on a tax-deferred basis under what is commonly referred to as a spousal rollover. This means that instead of triggering capital gains tax at the time of death, the tax is generally deferred until the surviving spouse later sells the property or passes away. While this can provide important flexibility, it does not eliminate the tax liability entirely, and planning is still required.

The potential capital gains tax exposure created by deemed disposition is one of the most important reasons why estate planning for cottages in Ontario deserves early attention.

What About the Principal Residence Exemption?

In some cases, a cottage may qualify for the principal residence exemption, which can reduce or eliminate capital gains tax on the property's growth in value. However, the rules are not always straightforward.

Generally, a family can only designate one property as a principal residence for a given year. This means families must decide how to allocate the exemption between a home and a cottage over time, depending on which property has appreciated more in value.

We previously explored this in more detail in our blog on principal residence trusts in Ontario. Understanding how the exemption works can make a meaningful difference when planning for the transfer of real estate in an estate.

Because the decision can have long-term tax implications, it is often something that benefits from careful review as part of a broader estate plan.

Family Decisions Are Just as Important as Tax Planning

While taxes are important, they are only one part of the conversation.

One of the most common challenges with passing down a family cottage is deciding who will inherit it. In many families, one child may feel a strong emotional attachment to the cottage, while others may live far away or have little interest in maintaining it.

Even when all beneficiaries want to keep the cottage, shared ownership can create practical challenges. Ongoing costs, maintenance responsibilities, booking time at the property, and decisions about repairs can all become points of tension.

These issues are often not immediate, but they tend to surface over time if expectations are not clearly discussed in advance.

Estate Planning Options for Ontario Cottage Owners

There is no single solution that works for every family. Estate planning for cottages in Ontario depends on both financial circumstances and family dynamics.

Some common approaches include leaving the property to one beneficiary while providing other assets to balance inheritances. In other cases, families may use trusts to help manage ownership and decision making over time. Another key consideration is ensuring the estate has enough liquidity to cover any taxes or expenses without forcing a sale of the property.

Some families also consider transferring ownership during their lifetime. While this can be part of a planning strategy, it is important to understand that transferring a cottage or rental property may trigger tax consequences at the time of transfer. What seems simple on paper can have unintended financial implications if not carefully structured.

The right approach depends on the specific goals of the family and the overall estate plan.

Many of the same considerations also apply to rental and investment properties. In addition to potential tax consequences, families should consider who will manage tenants, handle maintenance, and oversee the property if it is passed down to the next generation. For individuals with multiple properties, coordinated estate planning can help ensure assets are transferred in a way that is both practical and aligned with their wishes.

Ontario Probate Fees and Secondary Properties

In Ontario, the value of a cottage or rental property can also increase Estate Administration Tax, commonly known as probate fees.

While probate fees are often smaller than capital gains tax, they are still an important consideration when planning how an estate will be administered. For higher value properties, these costs can become meaningful and should be factored into overall planning.

Thoughtful estate planning can help reduce unnecessary delays and administrative costs while ensuring the property is transferred smoothly.

This issue often connects with other real estate planning considerations, including topics discussed in our blog on the first dealings exemption in Ontario.

Preserving More Than Property

For many Ontario families, a cottage represents something far more meaningful than an asset. It represents continuity, tradition, and time spent together.

The goal of estate planning for cottages in Ontario extends beyond minimizing taxes or administrative costs. It is about preserving the ability for future generations to continue enjoying a place that holds family history. As part of the estate planning process, you may also determine that selling the cottage is in the best interests of your estate and beneficiaries. Whether your objective is to keep the property in the family or to facilitate its eventual sale, careful planning is essential.

With thoughtful planning, families can reduce uncertainty, avoid unnecessary conflict, and create a clearer path for the next generation.

As cottage season continues it is time to think not only about the next weekend at the lake, but also about if and how to ensure the cottage remains part of the family story for years to come.

This article is intended for informational purposes only. For personalized advice tailored to your specific circumstance, please reach out to the E is for Estates team.

Erin L. Watson, B.A., JD

Lawyer & Notary Public

E is for Estates