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“I’ll transfer the cottage to my children’s names to avoid taxes.”
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“ ‘I’m going to put the cottage in the children’s names, that way there’ll be no tax.’ Here’s how to respond to this common mistake.”
Transferring your secondary residence to your children: a risky strategy with heavy consequences
It may seem wise to transfer your secondary residence (cottage, condo, duplex, etc.) to your children during your lifetime to “avoid taxes” upon death. This strategy is sometimes suggested as a way to bypass capital gains tax or simplify estate settlement. However, this decision carries significant tax and legal implications. Before proceeding, it’s essential to understand the real risks of such an approach.
1. The tax authorities consider this a taxable disposition.
Transferring a secondary residence to your children, even as a gift, is considered by the Canada Revenue Agency (CRA) and Revenu Québec to be a disposition at fair market value (FMV). You are therefore deemed to have sold the property at its current market price and must declare a capital gain.
Example: you bought your cottage for $100,000 twenty years ago. Its current value is $400,000. The capital gain is $300,000, of which 50% is taxable. This means that $150,000 will be added to your taxable income for that year, which can significantly increase your tax bill.
Note: unlike a principal residence, no capital gains exemption applies to secondary residences (unless you designated them as such for certain years, which is rare).
2. The child receives the property at fair market value… and will also pay tax later.
Your child, upon receiving the secondary residence, is considered to have acquired it at its fair market value. If they keep it for several years and its value increases, they will also have to declare a capital gain when selling it.
For example, if the property is worth $400,000 at the time of transfer but $600,000 at the time of sale, a new $200,000 gain will be added to their income.
Moreover, unless they live in it and designate it as their principal residence, no exemption will apply. The risk of multiple layers of taxation is therefore very real.