Will & Estate Plan & How To Deal With a Cottage Property

Unlike matrimonial or family homes, Will & Estate Plan & cottages often belong to either one party alone or are owned by multiple family members; or, they may have been passed down by family, or purchased using funds from an inheritance. As a result, most believe that these properties will be excluded from family equalization calculations upon the breakdown of a marriage or common-law relationship (i.e., the division of assets and funds between spouses upon the breakdown of marriage),

as is typically the case with property acquired during marriage via gifting or inheritance. A property qualifies as a matrimonial home under the Family Law Act if it was acquired via inheritance but was ordinarily occupied as a primary family residence as of the date of spousal separation.

Nevertheless, where a cottage property has been ordinarily occupied as a family residence, it may qualify as a family or matrimonial home, and thus be subject to equal division between spouses upon separation. This has substantial implications for any other family members, co-owners or parties that may have an interest in the cottage property.

So, we can understand that while cottages are typically a source of family fun and bonding  they can also be a source of family feud when it comes to division of property and estate planning issues. In particular, careless planning and poor will drafting can lead to prolonged litigation between family members, as was the case in a recent decision Donaldson v Braybrook, 2020 ONCA 66.

In Donaldson, a mother was owner of a cottage which she allowed all four of her adult children to use during specified times. In 1995, the mother transferred ownership of  the cottage to herself and two children as joint tenants “in fee simple”, and to two other children as additional transferees with a “life estate” in the cottage. Upon the mother’s passing, disputes arose between the children as to the interpretation of the language used by the mother in her registered transfer of title to the cottage.

The two “in fee simple” joint tenant children severed the joint tenancy, wishing to sell the cottage as tenants-in-common. This resulted in the remaining two “life estate” children taking their own  opposing positions: one agreed to renounce his life interest for the benefit of sale, while the other refused to give up her life interest, alleging she was an equal owner of the cottage.

At first, the court ruled that the latter indeed had a life interest in the cottage, with a right to its exclusive use. Ultimately, however, the Ontario Court of Appeal reversed the this decision, finding that this life interest in the property was not exclusive. In its decision, the Court of Appeal considered both the language used in the transfer, as well as the actual intention of the mother in making the transfer. It ruled that the mother’s intention was to give title in the cottage to the first two children, while extending the other two children a non-exclusive lifetime licence to occupy the cottage as long as they lived.

However, with a properly executed Will & Estate Plan, this dispute on how to divide the  cottage property could have been avoided had the mother taken advantage of more clear, explicit and concise language in her Will  and made her intentions as to the cottage property known. In light of this case,  the following are elements that should be taken into account in your estate plan if own a cottage:

• Plans for ownership and emotional attachments of family members:  try to get clear about this with your family members who may be co-owners of this property
• Affordability – can you continue to afford paying for the mortgage and maintenance of this property in addition to any other properties you own?
• Tax considerations and avoiding or minimising capital gains tax
• Cottage home may be considered a matrimonial home, and subject to equalization payment calculations
• Gift status: is the property deemed received before marriage vs. during marriage?
• The existence of a co-ownership agreement, if any, or putting a co-ownership agreement in place going forward
• Co-ownership agreements may address issues such as: the scheduling of usage of cottage (seasonal or otherwise); rules of cottage usage (residential or rental); rights of first refusal and limits on sale of cottage; division of payment for expenses, utilities and taxes; creation and maintenance of a financial reserve and annual budget; rules regarding renovations and “sweat equity”; and dispute resolution mechanisms
• Placing the cottage into a trust

In my practice advising clients on their cottage properties & estate planning, this issue comes up often. Contact me if you wish to discuss anything in this article or real estate & estates law in general.