Succession planning for the family vacation property

Succession planning for the family vacation property

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Parents often agonize over a succession plan for the family vacation property. That’s why it’s important to communicate with family members.

Many Canadians know the joys of owning a cottage, cabin, chalet, or other type of vacation property, and wish to pass the ownership and enjoyment to the next generation.


Designing a succession plan for the future ownership of your family vacation property can be challenging, especially because these properties often hold tremendous sentimental and monetary value. Also, it’s likely that more than one child may want ownership; however, the asset cannot be divided. As a result, the desire to keep the vacation property in the family may be impractical or inconsistent with your other estate planning goals.

Communicate to ensure a smooth transition


Parents often agonize over a complex succession plan for the family vacation property, only to learn later that some, or all, of their children have no interest in its eventual ownership. That’s why it’s important to keep the lines of communication open when developing your plan, and that it’s regularly reviewed to ensure it remains relevant for everyone concerned.


This is especially important in situations where children are unsure they want the property, their lives are unsettled, or sibling rivalry exists. Your succession plan for the family vacation property may need to be flexible or revised to make certain that it takes into consideration the unique dynamics of your ever-changing family situation.

Plan for liquidity


Most people apply the Principal Residence Exemption to the family home and have their estate pay any capital gains tax on a recreational property after their death. However, if your estate doesn’t have the liquid funds to pay the capital gains tax, you’ll need to consider ways to provide additional funds in your estate for this purpose. Instead of gifting the property, you can give your children the option to purchase it from your estate upon your death. Your children can use all or a portion of their cash inheritances to fund the purchase. The proceeds of the sale will then be available to the estate to pay taxes and distribute the balance to your beneficiaries.


You can also use insurance for a funding solution. In this case, your children purchase an insurance policy on both your and your spouse’s lives. Your children are the owners (pay the premiums) and beneficiaries (receive the proceeds at death) of the policy. Upon the last parent’s death, the proceeds of the life insurance policy provide the funds necessary to pay the taxes owed by the estate, and perhaps fund equalization payments to the other beneficiaries.

Personal trusts owning the vacation property


Until 2017, a personal trust that owned real estate could claim the Principal Residence Exemption under certain circumstances upon disposition of that property and avoid paying the capital gains tax. The caveat, of course, was that for the years the Principal Residence Exemption is claimed by the trust, the beneficiaries of the trust can’t claim the Principal Residence Exemption against their own residential property, upon disposition, during those same years.


Besides this caveat, for many high net-worth families, owning the family vacation property in a family trust has been a useful strategy for the purposes of keeping the property in the family and, for the purposes of the Principal Residence Exemption, eliminating significant capital gains tax, perhaps for several generations. However, as of January 1, 2017, new legislation disallows the Principal Residence Exemption from being utilized by all family trusts. Only the following types of personal trusts are eligible, as taxpayers, to utilize the Principal Residence Exemption (“Qualifying Trust”):


  • Alter Ego Trust (settlor 65 or older);
  • Joint Spousal/Partner Trust (settlor/contributor 65 or older);
  • Self-Benefit Trust (settlor any age);
  • Spousal/Partner Trust (settlor/testator any age);
  • Qualified Disability Trust (for a named “electing beneficiary” who is the settlor’s spouse or common-law spouse);


  • Trust for a minor child whose parents are deceased.


A note on trusts for a minor child whose parents are deceased: Once the minor child attains age of majority, that trust will constitute a family trust and will no longer be a Qualifying Trust for purposes of the Principal Residence Exemption. This means that when a trust is created in a Will to hold a vacation home for the benefit of minor children, once the youngest living child attains the age of majority, it would be prudent for the trustee to roll the property out of the trust to one of the beneficiaries. That beneficiary would then be able to use the Principal Residence Exemption when disposing of the property.


Likewise, for the other five trusts listed above, once the settlor and/or the surviving spouse is/are no longer alive, the trust will no longer qualify for the Principal Residence Exemption. The new law applies only to gains that accrue after December 31, 2016. That is, the Principal Residence Exemption will still be available to family trusts which continue to hold residential properties after 2016 with respect to the gains accrued prior to January 1, 2017. Such gains are sheltered from tax for the years prior to 2017, if the trust designates the property to be the Principal Residence upon disposition (actual or deemed).


With that in mind, there’s good reason to revisit existing estate plans in which a family trust own a vacation property. Depending on circumstances, it might be a good idea to distribute the property to one of the capital beneficiaries (who is also an income beneficiary) on a rollover basis, or, to resettle the property into a Qualifying Trust, in order to retain the Principal Residence Exemption availability with respect to post-2016 gains.


Transfer during lifetime


It’s possible to transfer the vacation property to your children during your lifetime – known as an “inter-vivos” transfer. However, the transfer will trigger capital gains tax on any increase in the value of the property since its purchase. The tax is must be paid unless you elect to utilize the Principal Residence Exemption at the date of the transfer and if the vacation property qualifies as a Principal Residence during the time you owned it.


This also applies to the transfer of your vacation property to a trust – except for an Alter Ego, Spousal, or Joint Spousal/Partner Trust. One disadvantage of a transfer of your vacation property to an inter-vivos trust is that you lose control over, and perhaps access to, the property, which can lead to problems if your intention is to continue using the property during your lifetime. Another disadvantage is that transferring the property to your children exposes the property to the children’s creditors, family law claims, and unexpected events that may make the property vulnerable.

Seek professional advice


While every family situation is unique, tax and estate planning professionals are experienced in helping you explore all the options available before selecting a succession plan that’s right for your circumstances.


Our BMO Private Banking Relationship Managers can help build a plan that’s right for you and your family.


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