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‘Tis the (Cottage) Season: Succession Planning for the Family Cottage 

With cottage season upon us, many vacation home owners may begin turning their mind to how to transfer ownership of a vacation property to the next generation. A family cottage, or other vacation property, is often one of the more difficult assets to address when developing a succession plan, and it can become a key point of contention and stress if not dealt with properly. Among the reasons for this potential for tension and conflict are the emotional and nostalgic ties a family often has with a vacation property, especially if the property has been held within a family for successive generations. Unlike most other assets, a vacation property is not divisible, which means that important decisions may have to be made regarding whether just one child should receive the property, or whether the property could be shared fairly and successfully among several children. Even if just one child wishes to receive the property, it can be difficult to achieve an equitable distribution of the estate where there may not be other assets of sufficient value to compensate the child (or children) who do not wish to receive the cottage. 

If your estate plan involves planning for a family cottage or other vacation property, there are a number of vital considerations to bear in mind and discuss with your advisor. Scrupulous planning today can go a long way to alleviate the risk of fractious disputes arising among family and loved ones down the road. 

Tax Considerations 

First and foremost, planning for the succession of a family vacation property requires giving due consideration to the tax implications arising from any such transition, including capital gains tax, land transfer tax and estate administration tax. Without careful planning, your estate trustee could be forced to sell the property to satisfy the considerable tax liability that typically arises on the death of a vacation property owner. The capital gain on a vacation property is usually quite high and, unless the property can be designated as the deceased’s principle residence, the estate may not have sufficient liquidity to satisfy the tax burden triggered on death. 

Ontario currently has the highest probate fee rates (called estate administration tax) in Canada and the probate fees arising from a transfer of the property on death can further result in a costly burden to the estate. Land transfer taxes are also payable on the transfer of a Canadian vacation property during lifetime or on death, and additional liability will incur where a beneficiary is not a citizen or resident of Canada. If a beneficiary is a US taxpayer, or the property is located in a foreign jurisdiction, this creates additional tax and succession complexities, especially as regards the “long arm” of the US estate and gift tax regime. 

Family Law Issues 

The possibility of a future equalization claim being brought subsequent to a beneficiary’s marital breakdown should also be considered when contemplating the transfer of a vacation property. A vacation property may constitute a “matrimonial home” under family law legislation if it is or was ordinarily occupied by the spouses as a family residence during the relationship. While the non-titled spouse might not acquire an interest in the property that is included in the calculation of 

family property, there is a risk that the property may have to be sold in order to pay an equalization payment arising from the breakdown of the marital relationship. 

While common-law couples are not entitled to the same equalization of family property under family law legislation, a constructive trust claim could be brought, which may result in an ex-partner acquiring an interest in property constituting a matrimonial home in some circumstances. 

Complexities of Co-Ownership 

If a vacation property is to be gifted to more than one beneficiary, either during lifetime or on death, it is important to consider the feasibility of a co-ownership arrangement, which is likely to be long-standing, as well as how title to the property will be held among the owners. For example, if the property is gifted to multiple children in joint tenancy, this would mean that only the beneficiaries or heirs of the last surviving child would inherit the property, which may not be a result the parents intended. It may also be prudent to make a gift of the vacation property contingent on the beneficiaries entering into a Co-ownership Agreement, or incorporate such an agreement in the Will itself. 

The viability of gifting a vacation property to multiple beneficiaries, usually being the children of the property owner, depends largely on the ability of the children and their families to get along. Their ability to get along should also be capable of enduring beyond the passing of the initial property owners, usually being the parents who are often a unifying presence for most families. Where the property may be held for successive generations, there is a greater risk of disputes arising, especially where there may be disparities in wealth among the co-owning families, and potential pressure from competing spouses who may be less likely to accept previously agreed-upon compromises. 

One of the ways in which some of these difficulties might be addressed is through a Co-ownership Agreement. A Co-ownership Agreement is a highly-customized and multifaceted document and should be drafted by a lawyer with expertise in this area and with input from the beneficiaries who are to receive an interest in the property. If the intended beneficiaries are unable to agree on crucial terms in the preparation process, this is likely an important indicator that they will not be capable of sharing the property successfully. 

As can be seen, there is no simple ‘one size fits all’ solution to passing a family vacation property on to the next generation. With careful planning and deliberation, however, you will be in a better position to structure the transition of your vacation property in a way that works best for you and your family. Of course, as with all estate planning and succession strategies, periodic review is also crucial to ensure ongoing relevance to changing life circumstances and evolving wishes. 

This article was written by a member of the Wills, Estate & Trusts team at McKenzie Lake. If you require assistance with a Wills, Estate & Trusts matter or wish to speak to a lawyer at McKenzie Lake Lawyers LLP, please call (519) 672-5666.