A family cottage held for decades usually carries a large gain, and at death it is taxed as if sold at fair market value. The estate needs cash to pay that tax, which can force a sale if nothing is planned; and children who inherit it together need a way to share it. This page covers how to estimate the tax, the main ways families pass a cottage on, and the agreement that keeps co-owning siblings on good terms. It is part of our estate planning guide; how cottages are taxed generally (rental income, selling one while alive) is in cottage and vacation property taxes.
Estimating the tax at death
When an owner dies, they are deemed to have sold the cottage at fair market value, and the gain over its adjusted cost base (purchase price, closing costs and capital improvements) is reported on their final return, unless it passes to a spouse, which defers the gain. 50% of the gain is taxable. How the deemed disposition works is in taxes at death.
Example: a cottage bought for $120,000, with $80,000 of documented improvements, worth $850,000 at death. The gain is $650,000, of which $325,000 is taxable. At an assumed 43% marginal rate, the tax is about $139,750.
A family can designate only one property a year as its principal residence, so the cottage is sheltered only for years it was designated instead of the city home, and only if the family ordinarily lived in it. Choosing which property to designate is covered in the principal residence exemption guide.
Four succession strategies
| Strategy | When the gain is taxed | Probate | Control kept? | Complexity |
|---|---|---|---|---|
| Leave it in your will | At death | Yes, unless a secondary will is allowed and used | Yes, during life | Low |
| Give it to the children now | On the transfer | No | No | Low |
| Transfer it to a trust | On the transfer to the trust, then every 21 years | No | Yes, as a trustee | High |
| Life insurance to pay the tax | At death, paid from the insurance | Insurance passes outside the estate | Yes | Moderate |
Leaving it in the will
The simplest route: the cottage passes under the will and the estate pays the tax from its other assets. If the estate doesn’t have enough cash, the cottage may have to be sold or mortgaged.
Giving it away now
If you give capital property (other than cash) as a gift, you are considered to have sold it at its fair market value at the time of the gift and report any capital gain or loss for that year, and the person who receives it is generally considered to have acquired it at that fair market value; a sale to someone you don't deal with at arm's length for less than fair market value is also treated as a sale at fair market value. A gift to your spouse or common-law partner, when you are both resident in Canada, is the exception: it generally passes at your cost with no gain or loss unless you elect to have it transferred at fair market value. So the tax comes now instead of later, and you give up control. It can make sense when the gain is still small.
A trust
A family trust or, for owners 65 and older, an alter ego or joint partner trust can hold the cottage, keep it out of probate and set rules for its use. A family trust is treated as having sold its property every 21 years, files annual T3 returns and needs a lawyer to set up. How the different trusts are taxed is in testamentary vs inter vivos trusts.
Life insurance
A joint last-to-die policy sized to the estimated tax pays the bill at the second death, so the children can keep the cottage. How insurance is used this way is covered in life insurance in an estate plan.
Keep the cost records
Every documented capital improvement raises the cost base and lowers the taxable gain. Records worth keeping:
- The purchase price, closing costs and legal fees
- New structures (a boathouse, garage, bunkie or addition)
- A dock or shoreline work
- A septic system or well
- A new roof, siding or foundation work
- A new heating system
- Major renovations and electrical upgrades
- Surveys and permanent land improvements (clearing, grading, road access)
A co-ownership agreement for siblings
Children who inherit together usually hold the cottage as tenants in common (see joint tenancy vs tenants in common). Without an agreement, any co-owner can ask a court to order the property sold, which is slow and costly. A written agreement usually covers:
- A schedule for who uses the cottage when
- How maintenance and capital costs are shared
- How major decisions are made
- A buy-out: a right of first refusal and an appraisal process
- What happens if one sibling wants out, including timelines and pricing
- Guests and renting it out
Related pages
Sources
The figures and rules on this page come from these sources, last checked against them between September 23, 2026 and October 1, 2026. How we check facts.
- Canada Revenue Agency: Capital Gains – 2025
- Justice Laws (Canada): Income Tax Act