Keeping the Cottage in the Family: Is a Trust the Right Move?

For many Ontario families, the cottage is more than real estate. It’s where the kids learned to swim, where summers were spent, and where the next generation hopes to make its own memories. So it’s no surprise that “How do we keep the cottage in the family?” is one of the most common estate planning questions parents ask. A Trust is often suggested as the answer. In some situations, it’s an excellent tool. In others, it adds cost and complexity without solving the real problem. The right choice depends on your age, how much the cottage has appreciated, and how well your children are likely to share it.

In this post, we walk through the tax issues, the main types of trusts available in Ontario, what they typically cost, and the family arrangements that matter just as much as the legal structure.

The tax problem every cottage owner faces

Canada has no inheritance tax, but when a cottage owner dies, the CRA treats the cottage as if it were sold at fair market value the day before death. Half of the resulting capital gain is added to the deceased’s income on their final tax return. The proposed increase to a two-thirds inclusion rate was cancelled in March 2025, so the rate remains 50%.

Here’s a simplified example. Say your parents bought the cottage for $300,000 and it’s now worth $900,000:

• Capital gain: $600,000
• Taxable portion (50%): $300,000
• Tax at Ontario’s top combined rate of about 53.5%: roughly $160,000
• Ontario Estate Administration Tax (probate), if the cottage passes through the will: about 1.5% of value over $50,000, or roughly $13,000

The Estate must pay that bill, often within months. If there isn’t enough cash or other assets, the children may have to sell the very cottage their parents wanted them to keep.

Two important exceptions: a cottage can pass to a surviving spouse (or a spousal Trust) without triggering the tax until the second spouse dies, and if the cottage qualifies as a principal residence, some or all of the gain may be sheltered. But a family can usually designate only one property as its principal residence for any given year, and that’s often the city home.

Your Trust options in Ontario

A Trust doesn’t make the capital gains tax disappear. What it can do is change when the tax is paid, keep the cottage out of probate, and set rules for how the family uses and manages it.

For many Ontario parents aged 65 and up, an alter ego or joint partner trust is the most practical choice: there’s no tax when the cottage goes in, you keep full use of it, and it passes to the children privately without probate. The capital gains tax still arrives on death, so planning for that bill remains essential.

A family Trust set up today makes more sense when the cottage hasn’t risen much in value yet, or when parents are prepared to pay some tax now to cap the future bill.

What a cottage trust typically costs

Costs vary widely with complexity and the professionals involved. The figures below are approximate ranges to help you budget; get quotes for your own situation.

Compare those costs against what you’re likely to save. Avoiding probate saves about 1.5% of the cottage’s value. Deferring tax, protecting the cottage from a child’s divorce, and preventing a family fight can be worth much more, but only if the structure fits your family.
 

Rules every cottage trust must work around

• The 21-year rule. Most family trusts are treated as selling all their assets every 21 years, triggering capital gains tax. Trustees often transfer the cottage out to the children before that anniversary, which can usually be done without immediate tax. Alter ego and joint partner trusts follow different timing tied to the owners’ deaths.
• Limited principal residence exemption. Since 2017, most family trusts can’t claim the principal residence exemption. Alter ego, joint partner and spousal trusts are among the few exceptions. If you’ve been counting on the exemption to shelter the cottage’s gain, a trust could cost you that benefit.
• High tax on retained income. Income kept inside a trust set up during your lifetime is taxed at the top personal rate. Cottages rarely earn income, but rental income can be an issue.
• Annual reporting. Trusts face expanded CRA reporting, including information about trustees and beneficiaries. Budget for an accountant every year.
• Control and flexibility. Once property is in a trust, it’s governed by the trust document. Changing your mind later can be difficult or costly, so think carefully before transferring.

Beyond tax: keeping the peace

The biggest threat to a family cottage is often not the CRA but disagreement among the children. One sibling lives an hour away and goes every weekend; another lives in Vancouver and visits once a year. One can afford a new roof; another can’t. A good plan answers these questions in advance:

• Who uses it, and when? A rotation schedule or booking system avoids summer standoffs.
• Who pays for what? Property tax, insurance, repairs and major projects. Some parents leave a separate cottage maintenance fund.
• How are decisions made? Majority vote, unanimous consent, or a named trustee with final say.
• What if someone wants out? A buyout formula and a right of first refusal let one child leave without forcing a sale.
• What happens when a child dies or divorces? A trust can keep the cottage within the bloodline and away from a child’s ex-spouse or creditors.
• Can it ever be sold? Spell out when a sale is allowed and how proceeds are divided.

These rules can live in the trust document itself or, if the children will own the cottage directly, in a separate co-ownership agreement. Talking with your children before finalizing anything is one of the best investments you can make. Not every child wants the cottage, and it’s far better to find that out now.

Alternatives to a Trust

A trust isn’t the only way to pass on a cottage, and for some families a simpler route works just as well.

• Leave it in your will. The simplest option. Your will can leave the cottage to your children together and include, or refer to, a sharing agreement. Probate applies, but there’s no upfront cost or annual filing.
• Life insurance. A joint last-to-die policy can pay the capital gains tax at death, so the children inherit the cottage without having to sell it. Insurance is often the most effective piece of a cottage plan, whether or not a trust is used.
• Joint ownership with your children. Adding children to title can avoid probate, but it carries real risks: you may lose control, the cottage could be exposed to a child’s creditors or divorce, and adding them may trigger capital gains tax on the share transferred. Courts may also presume the children hold it in trust for your estate unless you clearly document that you intended a gift.
• Selling or gifting it during your lifetime. Transferring the cottage to the kids now triggers capital gains tax, but it also settles the question while you’re around to guide it.
• Selling it. Sometimes the kindest choice is to sell, especially if no child wants or can afford the cottage, and divide the proceeds.

The bottom line

Setting up a cottage Trust in Ontario isn’t difficult, but choosing the right one takes careful thought. A trust can avoid probate, defer tax and set fair rules for the next generation. It can’t make the capital gains tax vanish, and the wrong type can cost you more than it saves.

Whatever route you choose, it starts with a clear, up-to-date Will. At SmartWills, we help Canadians create legally valid Wills that reflect their wishes for every asset, including the family cottage, so the next generation inherits memories rather than disputes.