Passing the Family Cottage Without a Forced Sale in London

The situation

Keisha built her career as a technology executive, and over the years she added a second income stream as a commercial landlord, holding a small portfolio of rental units around London. She was single with no children, and her closest family was her two younger siblings, Arman and Reza. When their parents passed away years earlier, Keisha had inherited the family cottage outright, a lakeside property the family had owned since the 1980s. She had always intended for Arman and Reza to inherit the cottage jointly when she died, so that it stayed in the family the way it had for her.

Keisha came to Treadstone Law wanting a will that named her siblings as beneficiaries of the cottage. It seemed like a simple instruction. During the intake call, our team asked a question that changed the shape of the file: what had Keisha's parents originally paid for the cottage, and what was it worth now? Keisha did not know the exact numbers, but she knew the cottage had been purchased decades earlier for a fraction of its current value. That gap, between what was paid and what the property was now worth, turned out to be the real problem her will needed to solve.

What the estate review found

In Canada, a cottage is not treated the same way as a principal residence for tax purposes unless it is specifically designated as one. When a person dies owning a property that has appreciated in value, the tax rules treat the death as if the property were sold at its fair market value immediately before death, even though no actual sale takes place. This is called a deemed disposition, and it can trigger a large capital gain on paper, with the resulting tax owed by the deceased's estate on the final tax return.

Our team asked Keisha to have the cottage appraised and worked with her to reconstruct the original purchase price from old records. The numbers were significant. The cottage was now worth roughly $1,800,000. Her parents had purchased it decades earlier for close to $300,000, and Keisha's cost base carried forward from them, since she had inherited it rather than bought it herself. That left an unrealized capital gain of roughly $1,500,000.

Only half of a capital gain is added to a person's taxable income in the year it is realized, so the deemed disposition would add roughly $750,000 to Keisha's income on her final tax return. Combined with her salary, investment income and rental income in her final year, that gain would be taxed at her top marginal rate, producing an estimated tax bill in the range of $380,000 to $420,000 tied to the cottage alone. Keisha also owned her own home in London and had never turned her mind to which property, if either, should be designated as her principal residence for tax purposes, a designation that can reduce or eliminate the capital gains tax on one property but only one per family unit per year it is claimed.

Without planning, Keisha's will as she first described it would have left Arman and Reza a cottage, and left her estate with a large tax bill and no obvious source of cash to pay it. Estates generally must pay their tax liability before distributing assets to beneficiaries. If the estate did not have enough liquid funds, the executor could be forced to sell the cottage, or Arman and Reza could be forced to come up with the cash personally to keep it, precisely the outcome Keisha wanted to avoid.

What we did

1. Quantified the projected tax liability before drafting anything. Rather than starting with the will, our team worked backward from the numbers: current fair market value, adjusted cost base inherited from her parents, and Keisha's expected marginal tax rate. This gave a realistic range for what the estate would owe on the cottage alone, instead of a guess made after the fact by an executor scrambling to pay the Canada Revenue Agency.
2. Reviewed the principal residence exemption across both properties. Keisha owned her London home and the cottage. Only one property can be designated as a principal residence for a given year, and the exemption is calculated based on the years it is designated relative to years owned. We modelled how designating the cottage for certain years, rather than her home, could meaningfully reduce the taxable gain on death, while accepting a smaller trade-off on the London property. Keisha made an informed choice about which property to prioritize going forward.
3. Recommended a life insurance policy sized to the projected tax bill, not a round number. We connected Keisha with an independent insurance advisor to price a policy that would pay out an amount close to the estimated tax liability. Life insurance proceeds are not taxed as income to whoever receives them, and when paid to an individual beneficiary they typically bypass probate entirely — an advantage we weighed against the certainty of directing the funds specifically toward the tax bill.
4. Structured the will so the insurance proceeds fund the tax bill directly. The will named the estate itself, rather than Arman and Reza personally, as the beneficiary of the policy. Naming the estate means the proceeds form part of the estate rather than bypassing it, but it guarantees the funds are there for the executor to use, and the will directed the executor to apply them first to the tax liability arising from the cottage before distributing the property. This meant Arman and Reza would inherit the cottage clear of the debt attached to it, without having to negotiate who paid what after the fact.
5. Addressed joint ownership going forward for Arman and Reza. Once the cottage passed to the two siblings, our team recommended they document how they would share costs, usage and eventual disposition between themselves, since co-owned cottages are a common source of family conflict when expectations are never written down. We prepared a co-ownership agreement to sit alongside the will for them to execute once the transfer took place.
6. Built in a review trigger rather than a one-time fix. Property values, tax rates and Keisha's own income could all change over time, so the will included instructions for her executor to reassess the adequacy of the insurance funding periodically, and Keisha agreed to revisit the numbers with our team every few years rather than treating the plan as permanent.

The outcome

Keisha's will now leaves the cottage to Arman and Reza jointly, with a life insurance policy earmarked to cover the capital gains tax the deemed disposition will trigger. Instead of an executor discovering a six-figure tax bill with no obvious source of funds, the plan anticipates it and pays for it in advance, through insurance proceeds earmarked and legally directed to that purpose the moment they reach the estate. Arman and Reza will inherit a cottage that is genuinely theirs, without a looming tax debt or the pressure to sell a property their family has held for decades.

The principal residence exemption review also gave Keisha a concrete, ongoing decision to make rather than a one-time form to sign. She now tracks which property she intends to designate each year, understanding the trade-off involved, so the choice reflects a deliberate strategy rather than whatever the executor happens to guess after she is gone.

The total estimated cost of the insurance premiums over Keisha's remaining working years is modest compared to the tax bill it is designed to cover, and Keisha described the peace of mind as worth more than the premium itself. The file is a clear example of the difference between planning for a tax liability and discovering one: the same cottage, the same beneficiaries, but a radically different outcome for the family depending on whether the capital gains problem was addressed years in advance or left for an executor to untangle after the fact.

What you can learn from this