What are the tax issues when I transfer a cottage to my kids in Ontario?

Cottages are among the most tax-sensitive family transfers in Ontario because they are rarely a principal residence and often have significant accrued capital gains built up over decades of ownership.

When you transfer a cottage to your children, CRA treats the transfer as a deemed disposition at the fair market value on the date of transfer. The difference between the fair market value and your adjusted cost base (original purchase price plus eligible capital improvements) is the capital gain. A portion of that gain is included in your income in the year of transfer. The principal residence exemption generally cannot shelter a cottage unless you actually designated it as your principal residence for some of the years you owned it — and the family can only designate one property per year.

Ontario land transfer tax will also apply, calculated on the fair market value, and there is no family exemption for parent-to-child cottage transfers.

Because of the income tax hit, some families explore a gradual transfer, a family trust, or a life interest arrangement to spread or defer the gain. Each strategy has its own costs and complications. A tax lawyer or accountant who handles estate and real property planning should be involved well before any transfer documents are signed.