Passing the cottage to your kids without a forced sale

Plenty of Ontario cottages have been sold to pay the tax bill on a parent’s estate, with kids who wanted to keep it. A few years of planning can avoid that. This guide explains how the tax works and the main options, in plain language, so you can have a better conversation with your accountant and estate lawyer.

How the tax gets triggered

Canada generally taxes accrued capital gains at death rather than imposing a separate inheritance tax on the beneficiary. Instead, when someone dies, they are treated as if they sold their capital property, including a cottage, at fair market value just before death. That is called a deemed disposition. Any gain is reported on the final tax return.

• Spouse first: a cottage left to a spouse or common-law partner can generally roll over at its original cost, so the tax is deferred until the surviving spouse dies or sells.
• Kids next: when the cottage passes to children, the deemed sale happens and the gain is taxed in the estate.
• Gifts during life are also treated as a sale at fair market value, even if no money changes hands.

The inclusion rate is still 50%

The estimate uses the one-half capital-gains inclusion rate reflected in current CRA guidance. Inclusion is the portion added to taxable income, not the final tax rate. A proposed tax change is not a substitute for the enacted rule and the guidance applicable to the disposition year.

A simple example

Your parents bought the cottage for $200,000. When the last parent dies it is worth $800,000. The gain is $600,000. Half of that, $300,000, is added to income on the final return. Depending on the rest of the estate’s income, the tax can easily reach six figures. Real numbers also include the cost of improvements, which raises the cost base and lowers the gain.

Option 1: the principal residence exemption

A family unit can designate one property per year as its principal residence. If the cottage has gained more per year than the city home, it can make sense to designate the cottage for some or all years and pay tax on the city home instead. This is a choice made when a property is sold or deemed sold. Our principal residence guide walks through the math.

Option 2: gift or sell during your lifetime

Moving the cottage to your kids while you are alive locks in today’s gain and lets future growth build in their hands. The catch:

• A gift to your kids is treated as a sale at fair market value, so you pay tax on the gain now.
• Selling below market value to family is a trap. You are taxed as if you received full market value, but your child’s cost is only what they paid, so the same gain can be taxed twice.
• Some families sell at full market value and take back a promissory note, which can spread the taxable gain over several years using a capital gains reserve. Your accountant will check whether it fits.

Option 3: a cottage trust

A trust can hold the cottage for your kids and grandkids. It can make sense for some families, but it has costs and rules:

• Moving the cottage into most trusts is itself a deemed sale at market value.
• Most trusts are deemed to sell their property every 21 years, so the trust must plan to distribute the cottage or pay tax before then.
• Trusts have legal and accounting costs and file their own tax returns each year.
• Older couples sometimes use a joint spousal or alter ego trust, which works differently. Ask your lawyer.

Talk to Jeff and Emily

Keeping the cottage in the family may mean one sibling buying out the others or refinancing to pay a tax bill. Book a call and we will show you the mortgage options.

Or call or text 416-628-9682

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Option 4: life insurance to pay the tax

Many families buy a joint last-to-die life insurance policy sized to cover the expected tax on the cottage. When the second parent dies, the payout covers the bill and the kids keep the cottage. An insurance advisor can quote it, and your accountant can estimate the amount needed.

Option 5: the kids buy out the estate

If one child wants the cottage and others want cash, that child can buy the others out, often with a mortgage or home equity. See buying out a family cottage for how lenders handle it.

Probate on a cottage in Ontario

Separate from income tax, Ontario charges estate administration tax when an estate applies for probate. As of October 2026 it is $0 on the first $50,000 of estate value and $15 per $1,000, or part thereof, above that. Some families reduce it by how they hold title, but every option has trade-offs, so get legal advice.

Keep your cost records

The gain is the value minus your adjusted cost base. Capital improvements such as a new septic bed, an addition or a new dock can raise the cost base and lower the tax. Repairs and upkeep generally do not. Keep invoices in one folder, for decades if needed.

Underused Housing Tax is gone from 2025

The federal Underused Housing Tax was eliminated for 2025 and later years. Filing obligations for 2022 to 2024 still apply where they were required, so check with your accountant if your cottage is held in a trust or partnership.

Start the conversation early

The best plans start 10 to 20 years before they are needed, with the whole family at the table. Ask who actually wants the cottage, who can afford their share, and what is fair to the kids who do not. Then take it to an accountant and estate lawyer. If financing is part of the answer, we are here at get started.