How to Keep the Family Cottage in the Family: Strategies to Incorporate Now to Reduce Capital Gains Tax When You’re no Longer Here

by | May 31, 2023 | Featured, Financial Strategy, Tax Planning & Preparation


Many Canadians love their family cottage and expect to pass it on to the next generation. But the rising value in real estate can offer a real problem that may make it impossible for the legacy of the cottage to live on. As a secondary residence, capital gains tax kicks in and can be substantial, but there are ways to minimize the impact.


What is capital gains tax?

Let’s first review what capital gains tax is and how it is calculated. In Canada, when you make a profit on the sale of a secondary property, such as a family cottage, the government wants their cut too. For example, you may have purchased a cottage in 2001 for $150,000 and now in 2023, it is worth $300,000. The capital gain on the property would seemingly be $150,000. However, you did make some improvements including renovation of the kitchen and the addition of a garage for a total cost of $50,000. There were also expenses such as legal fees and sales commissions totaling $3,000 to purchase the property. You also incurred costs to sell the property – sales commissions and advertising costs to the tune of $10,000. Furthermore, you only report as taxable income half of the profit you make.


Here’s how you would calculate the capital gain:

Purchase Price$150,000
Acquisition Costs (to purchase the property)+ $3,000
Renovations & Additions+ $50,000
Outlays & Expenses (selling costs)+ $10,000
Adjusted Cost Base (ACB)$213,000
Selling Price (or Fair Market Value)$300,000
Profit (actual capital gain)$87,000
Taxable Capital Gain (50% of the profit)$43,500

Let’s also assume that, in the year in which you sell the cottage (2023), your taxable income is $100,000 (from employment, pensions, investments, etc.). The additional $43,500 in taxable capital gains will increase your total taxable income to $143,500. 

To estimate the tax on the capital gain, you would look at the tax table for your province which can be found at Here’s the calculation for Manitoba (excluding the impact of any specific deductions or credits you may have):


Combined Manitoba Federal & Provincial Tax Rates 2023

Taxable IncomeMarginal Tax RateTax Payable
first $36,84225.80%$9,505 on the first $36,842
$36,843 to $53,35927.75%$4,583 on the next $16,517
$53,360 to $79,62533.25%$8,733 on the next $26,266
$79,626 to $106,71737.90%$10,267 on the next $27,092
$106,718 to $165, 43043.40%$15,963 on the final $36,783
$165,431 to $235,67546.72%
over $235,67550.40%
Total Tax Payable
Total Taxable Income

According to the marginal tax rates in the chart above you would pay a tax bill of $49,051 on your total taxable income of $143,500.


Keep track of your Adjusted Cost Basis (ACB)

It is important to keep a record of all the qualifying expenses that can increase your adjusted cost base and decrease capital gains upon selling or transferring ownership of your property.

  • You can include acquisition costs such as legal fees and commissions paid to purchase the cottage.
  • If you’ve made capital improvements or additions to the property, those also count toward your ACB. These include things like a kitchen renovation and building a garage.
  • When it is time to sell the property, keep track of the expenses to fix up the property for sale (capital costs only) and the costs to sell it including finders’ fees, commissions, surveyors’ fees, legal fees, transfer taxes, and advertising costs.

Keep all the receipts and invoices associated with these expenses in a file for CRA in case they need to look at what has transpired. We’ve also developed an ACB Tracker tool to help you keep it all organized over the years and ensure you are aware of the potential capital gain.

Click here for the Adjusted Cost Base Tracker

Calculator - ACB Tracker

Tip: keep this tracker updated for all of your properties including your current principal residence. You may decide to apply your principal residence exemption to another property and will need to have the ACB available on your current home.


Capital gains on inherited property

Whether you sell the cottage to your kids at a discount, gift it now, or leave it to them in your Will, the transaction is considered a *deemed disposition at Fair Market Value (FMV), and capital gains are triggered. For this reason, you need to think about the best and most tax-efficient way to transfer ownership. Upon your passing, the capital gains tax will be reported on your final tax return. If your estate doesn’t have sufficient funds to pay for the tax bill, your executor may have to sell the cottage.

*When a person passes away, they are considered to have sold all their property just prior to death. The term for this “sale” is deemed disposition. The property may or may not trigger a capital gain or loss.



Considerations and strategies for keeping the cottage in the family


Who gets the cottage?

Three stick people with linked armsBefore you implement any strategy the first order of business is to determine who will be receiving the property. Call a family meeting and consider the following questions:

  • Do the kid(s) actually want the cottage?
  • Can the kid(s) afford the upkeep?
  • If siblings need to share, will they get along or will the beloved family cottage cause a rift?
  • Can an arrangement be made that is fair to all the beneficiaries involved? If you are giving the cottage to one beneficiary and leaving cash or some other asset(s) to another, the capital gains tax can make it an inequitable arrangement.

If the answer is “no” to any of these questions, you may be better off strategizing the public sale of the cottage rather than the transfer. But, if the answer is “yes, yes, and yes” there are several strategies to explore for the most efficient transfer of ownership.


Drawing of a present

Gift the cottage now and you pay the capital gains tax

If you gift the family cottage to your kids, you can opt to handle the payment of capital gains yourself. You will pay based on the fair market value of the cottage at the time you gift it and based on your ACB. In this scenario, your kid’s ACB will become the FMV at the time they receive the cottage. You may be able to defer the tax bill over 5 years using the capital gains reserve.



Utilize the Principal Residence Exemption (PRE)The acronym PRE with a checkmark

Current tax rules allow you to sell your principal residence without triggering capital gains tax. You may be able to designate the family cottage as your principal residence if it makes sense to do so. But you need to consider how much your family home and your cottage have appreciated in value. If one has appreciated more than the other, then consider designating the higher-value property as your principal residence. If the family cottage is designated as your principal residence for tax purposes, when you pass on, your executor can use the exemption on your final/terminal tax return.


Purchase a life insurance policyDrawing of a family with an umbrella protecting them

You could purchase an insurance policy that will cover the tax bill for the capital gain on the cottage at the time of your death. Your beneficiaries could own the policy and pay the premiums, or you could own the policy and designate your estate as the beneficiary of the policy. In this case, the executor could use some or all of the proceeds to pay the capital gains taxes.


Create a trust or limited partnershipDrawing of a signed document

There are many complexities when dealing with estates. For more complex planning situations it may be advisable to own property within a trust or limited partnership. This would need to be part of a comprehensive tax plan.


Seek help – it’s complicated!

There are many factors at play with the family cottage. Have you been renting it out? There are many other considerations when renting is involved. Furthermore, the family cottage is just one small aspect of your entire estate plan.

If you really want to keep the cottage in the family and avoid a big tax bill, talk to us or whoever does your financial planning, as well as your accountant and your lawyer. We can host the family meeting, coordinate with your other professional advisors, and run scenarios so that you can see the impact of implementing the above strategies.

Think about it on the dock, around the fire, or in the boat this weekend, and contact us to get started.

The information in this commentary is for informational purposes only and not meant to be personalized financial planning advice. The content has been prepared by the team at Fraser & Partners from sources believed to be accurate.

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