top of page
Writer's pictureKristy Morrison

How to Save the Family Cottage Without Breaking the Bank.


If you’re like many Canadians, your family cottage is more than just a property—it’s a legacy. Generations of memories, summer evenings by the lake, and traditions that run deep. But here’s the kicker: the recent capital gains tax changes could turn that cherished inheritance into a major financial burden.


What’s Changing?

As of June 25, 2024, the capital gains inclusion rate jumped from 50% to 66.67%. Now, before you panic, the first $250,000 of net gains per year is still taxed at the 50% rate for individuals and some trusts. But this hike is enough to make cottage owners nervous—and rightly so. With property values through the roof, handing down your family’s beloved cottage might now come with a tax bill that’s enough to make you gasp.

When I sit down with families worried about passing on their wealth, I see the fear and frustration these new rules are causing. But there’s a way to dodge this tax bomb—and trust me, it’s one that’s gaining a lot of traction: permanent life insurance, particularly joint last-to-die policies.


What’s the Deal with Capital Gains Taxes, Anyway?

Let’s break it down. When someone passes away, any property they own (other than their primary residence) could be hit with capital gains taxes. The tax is based on the difference between the property’s adjusted cost base (which includes what you paid, plus eligible expenses and improvements) and its fair market value at the time of death.

With the new inclusion rate, two-thirds of that gain gets treated as taxable income (less the first $250,000 of net gains). If your family cottage was bought for peanuts decades ago and is now worth a small fortune, you could be looking at a tax bill that’d take your breath away.


Enter: Joint Last-to-Die Life Insurance

For couples who want to keep the family cottage in the family (without the taxman grabbing a big chunk), joint last-to-die life insurance is the golden ticket. These policies cover both spouses but only pay out when the second one passes away—which, coincidentally, is when the tax man typically comes knocking.

The tax-free payout can be used to settle the capital gains taxes, meaning your heirs won’t have to scramble to sell off a treasured piece of your family history just to pay the bill.


Real-Life Example: John and Susan's Muskoka Cottage

Let me give you a real-world scenario. John and Susan, both in their late 60s, have owned a beautiful cottage in Muskoka for over 30 years. It’s the spot where their kids grew up and where the grandkids are now making their own memories. It’s priceless to them. But when they heard about the new capital gains tax rules, they were floored by what it could mean for their kids’ inheritance.


They bought the cottage for $300,000, but today, it’s worth $2 million. Sounds great—until they realized the $1.7 million increase in value could lead to a massive tax bill. The first $250,000 of gains would be taxed at 50%, but the rest? That’s hit with the 66.67% inclusion rate. That works out to about $1.1 million in taxable gains, leading to a tax bill north of $580,000 (thanks, Ontario’s 53.53% tax rate).


Without a plan, their kids would likely have to sell the cottage to pay the taxes—something John and Susan just couldn’t stomach. So, they sat down with their insurance advisor and purchased a joint last-to-die life insurance policy with a $400,000 payout, just enough to cover most of the tax bill. Now, they can rest easy, knowing the cottage will stay in the family for future generations to enjoy.


What Should You Do Next?

This bump in the capital gains inclusion rate is a serious wake-up call for cottage owners across Canada. If preserving your legacy is important to you, it’s time to sit down and review your estate plan. Life insurance isn’t just for peace of mind—it’s a financial tool that can protect your family from having to liquidate assets in the middle of a tough time.

Joint last-to-die policies are more affordable than you might think, and even if only one spouse is insurable, there’s a good chance you can still secure a policy. It’s an option that’s definitely worth considering for long-term estate planning.

By taking proactive steps now, you can ensure that the family cottage—packed with years of love and memories—gets passed on as a legacy, not a liability.



With that said I am NOT a financial planner or insurance specialist so be sure to discuss this with those experts to fully review your personal file accordingly.


------

Kristy Morrison

Your Agent For Life

Century 21 Synergy Realty, Shareholder.

I LOVE REFERRALS -YOU LOVE VACATIONS!

-WORK WITH OR REFER ME a client & You'll be entered in to win a 7 night stay at Villa Serenidad in Costa Rica. An ocean side golf community you'll most defintly love.


The views shared on this webpage / blog are personal views to the author and does not represent the brokerage or anyone else.

6 views0 comments

Commentaires


bottom of page