Should we pass the cottage down to our kids now, or wait?

In 2010, we moved to our cottage. We are getting older and have considered selling. But our two daughters want to keep it in the family and have proposed we turn the ownership over to them now while we are still alive and healthy. What are the pros and cons of this idea?—Joan and Bob Bowman, Sauble Beach, Ont.

Unfortunately, our go-to succession expert, lawyer Peter Lillico of Lillico Bazuk Galloway Halka in Peterborough, Ont., says that there are really only cons to this strategy. At least from a capital gains tax point of view. It would be tax ineffective to move cottage ownership from its current tax exempt status to taxable in the names of the daughters earlier than necessary, he explains.

He assumes that when you moved to your cottage, you sold your house and used the principal residence exemption to avoid paying the capital gains tax on that sale. But, keep in mind, “even though the cottage is now your principal residence, and can be for the rest of your lives, there is still the tax arising from the years prior to 2010,” says Lillico. So, when you transfer ownership to the kids, the cottage will only be partly exempt. And doing that transfer now, if you don’t need to, would “reduce your retirement nest egg prematurely,” he says.

Another con? “There’s the potential liability issues from a daughter having creditors or getting divorced,” he says. (He’s not throwing shade on your daughters, but life issues—financial, matrimonial—do happen. Keeping the cottage in your name means the cottage is protected for as long as possible.)

It’s not that transferring the cottage to your kids isn’t a good planning strategy. It just may not be a good strategy for you right now. But a time may come when you can’t live at the lake anymore, say, for health or financial reasons, says Lillico. In that case, “the equation might change.”

For more advice from Peter on this topic, sign up for our newsletter Family Matters: cottagelife.com/newsletters.

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