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Capital Gains, Cottage Succession and Estate Freezes: Smart Planning for 2025 and Beyond

Capital Gains, Cottage Succession and Estate Freezes Smart Planning for 2025 and Beyond

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Your family’s cherished cottage by the lake, where summer evenings are spent with laughter echoing over the water and memories are woven into every weathered board, comes with a hefty tax bill that could hit when it’s time to pass it or worse, the risk of losing it to taxes or poor planning. In Canada, where capital gains taxes, estate planning, and cottage succession intersect, 2025 brings a fresh urgency to secure your legacy.

At Forum Estates LLP, we’re here to guide you through the maze of new tax rules, estate freezes, and succession strategies to ensure your family’s wealth and that beloved cottage stay protected for generations. Let’s dive into the complexities of capital gains, cottage succession, and estate freezes, blending practical advice with the latest legal updates for a plan that’s as robust as it is forward-thinking.

The Capital Gains Landscape in 2025: What’s New?

Canada’s capital gains tax regime has been a rollercoaster lately, and 2025 is no exception. The federal government proposed a significant change in the 2024 Budget, increasing the capital gains inclusion rate from 50% to 66.67% for individuals with annual capital gains exceeding $250,000, as well as for all corporations and trusts.

This shift was initially set to take effect on June 25, 2024, but on January 31, 2025, the government announced a deferral to January 1, 2026, keeping the inclusion rate at 50% for 2024 and 2025. This pause, as noted by KPMG Canada, gives taxpayers a breather to plan strategically before the higher rate kicks in.

What does this mean for you?

If you sell a cottage, investment property, or shares, only 50% of the gain is taxable in 2025, but come 2026, two-thirds of gains above $250,000 (for individuals) will be taxed at your marginal rate. For trusts and estates, the 66.67% rate will apply to all gains, with no threshold. This makes proactive planning critical, especially for high-value assets like cottages or business shares.

Additionally, the Lifetime Capital Gains Exemption (LCGE) increased to $1.25 million as of June 25, 2024, for dispositions of qualified small business corporation (QSBC) shares or qualified farm or fishing property (QFFP). The new Canadian Entrepreneurs’ Incentive, effective in 2025, further reduces the inclusion rate to one-third on up to $2 million in lifetime gains for qualifying businesses, rising by $400,000 annually until 2029.

As Benjamin Franklin once quipped, “In this world, nothing can be said to be certain except death and taxes.” At Forum Estates LLP, we say: plan for both, and you’ll sleep better.

Cottage Succession: Keeping the Family Retreat in the Family

Cottages aren’t just properties; they’re emotional anchors. But passing them on can trigger hefty capital gains taxes due to Canada’s deemed disposition rules.

When you die, the Income Tax Act (RSC 1985, c 1 (5th Supp), s 70(5)(a)) treats all capital property as sold at fair market value (FMV) immediately before death, potentially creating a significant tax liability.

For a cottage bought decades ago for $100,000, now worth $1 million, the $900,000 gain could mean a tax bill of nearly $150,000 at a 50% inclusion rate and a 33% marginal tax rate. 

  • Strategies to Minimize Tax Hits
  • Spousal Transfers: Transferring the cottage to a surviving spouse or a testamentary spousal trust can defer capital gains taxes, provided the property is locked in within 36 months of death (Income Tax Act, s 70(6)). This keeps the tax burden at bay until the spouse’s death or the trust’s disposition.
  • Principal Residence Exemption (PRE): Your primary residence is exempt from capital gains tax, and a cottage can qualify if designated as such. However, post-death, the estate or trust can only claim the PRE if a beneficiary meets specific conditions, like residing in the property (Income Tax Folio S1-F3-C2). Strategic designation is key—consult a professional to avoid pitfalls.
  • Family Trusts: A family trust is able to assign gains to recipients and take advantage of his/her LCGE or lower tax brackets. As an illustration, when there are multiple beneficiaries eligible, they will be able to claim up to $1.25 million of exemptions on gains on QSBC or QFFP and save a lot of taxes (Parr Business Law, 2024). But under the Income Tax Act (s 104(4)) the existence of trusts is considered as selling assets at 21-year intervals and so taxes have to be paid on the value of assets that had not been liquidated.

Estate Freezes: Locking in Value, Passing on Growth

An estate freeze is equal to putting your tax obligation on hold, so that any subsequent growth would be transferred to the next generation tax-free. It is one of the building blocks of the implementation of clever estate planning, given the pending increase in inclusion rates of capital gains. That way, it works like this: you create a freeze of the present-day FMV of your assets (e.g. business or cottage,) transferring all future appreciation to your heirs or a trust.

  • How to Execute an Estate Freeze
  • Corporate Freeze: If you own a business, you can exchange your common shares for fixed-value preferred shares, issuing new common shares to your children or a family trust. The future growth accrues to them, reducing your tax liability at death (Income Tax Act, s 86). This is particularly effective for QSBC shares eligible for the LCGE.
  • Trust-Based Freeze: Transfer assets like a cottage to an inter-vivos trust, fixing their value. Beneficiaries inherit the future growth, and you can maintain control as a trustee. This also avoids probate fees, which can reach 1.5% of an estate’s value in Ontario.
  • Alter-Ego or Joint-Spousal Trusts: These trusts allow you to defer capital gains until the death of the last surviving spouse. However, upon that death, gains are taxed at the trust’s top marginal rate (33% federal plus provincial), not the beneficiary’s, making timing critical (Raymond James, 2024).

A Real-World Example

Consider the Smith family, clients of Forum Estates LLP. Their Muskoka cottage, purchased for $200,000, is now worth $1.2 million. Without planning, the $1 million gain at death could trigger a $165,000 tax bill (at 50% inclusion, 33% marginal rate). By implementing an estate freeze via a family trust, they lock in the $1.2 million value, passing future growth to their children. If the cottage appreciates to $2 million, the additional $800,000 grows tax-free in the trust, saving tens of thousands in taxes.

We human beings are wired to want to matter. Conservation psychology shows that leaving a green legacy taps into deep emotional drives: to protect, to endure, to contribute to something larger. A study reveals that:

The 2025 Regulatory Horizon: What to Watch

The Canada Revenue Agency (CRA) continues to enforce enhanced trust reporting rules for 2024, requiring T3 returns and Schedule 15 filings by March 31, 2025, for trusts with a December 31 year-end. Late filers get relief from penalties and interest until May 1, 2025, due to the capital gains confusion (Canada.ca, 2025).

Meanwhile, the Clean Technology Investment Tax Credit offers refundable credits for real estate investment trusts investing in clean tech post-March 28, 2023, which could benefit cottage owners retrofitting properties. 

The 2025 federal election may also shake things up. Wealthsimple notes that capital gains rules could shift again post-election, so flexibility is key.  

As John Kenneth Galbraith wrote in The Affluent Society (1958), “The only function of economic forecasting is to make astrology look respectable.”

Stay ahead by planning now with Forum Estates LLP. 

Practical Steps for 2025 and Beyond

  • Review Your Assets: List all capital properties (cottages, investments, businesses) and estimate potential gains. Use tools like Wealthsimple’s income tax calculator to project liabilities.
  • Engage Professionals: Estate planning isn’t DIY. As Investopedia advises, enlist tax advisors, lawyers, and financial planners to tailor strategies (Investopedia, 2025). At Forum Estates LLP, our team at ForumEstates.ca specializes in bespoke solutions.
  • Consider Timing: With the inclusion rate hike deferred to 2026, 2025 is the year to realize gains or set up freezes. Selling before January 1, 2026, locks in the 50% rate.
  • Leverage Trusts: Family trusts can multiply LCGE benefits and protect assets from creditors (BDO Canada, 2022). Ensure compliance with the 21-year rule to avoid unexpected taxes.
  • Plan for Succession: Draft a clear cottage succession plan, specifying ownership, maintenance costs, and usage rights to prevent family disputes. A 2023 study by the University of Toronto’s Rotman School of Management found that 60% of family wealth transfers fail due to poor communication, don’t be a statistic.

Why Forum Estates LLP?

At Forum Estates LLP, we don’t just crunch numbers; we craft legacies. Based in Canada, our team combines legal expertise, tax acumen, and a passion for preserving your family’s story. Whether it’s saving your cottage from a tax tsunami or freezing your business’s value for your kids, we’re your partners in planning for 2025 and beyond. Visit ForumEstates.ca to book a consultation and secure your estate today.

Final Thoughts

The desire to save taxes on capital gains as well as cottage succession and estate freezing is one thing, but saving what is most important is another. With the restrictions of the CRA and the tax rates hovering above, 2025 is your time to move.

Let’s borrow from The Wealthy Barber by David Chilton (1989): “The best time to plan your finances was yesterday; the second-best time is now.” With Forum Estates LLP, you can turn tax challenges into opportunities, ensuring your cottage stays a haven and your wealth endures.

References:

  • Income Tax Act, RSC 1985, c 1 (5th Supp), ss 70(5)(a), 70(6), 86, 104(4).
  • Canada Revenue Agency, T3 Trust Guide, 2024.
  • Galbraith, J.K., The Affluent Society, 1958.
  • Chilton, D., The Wealthy Barber, 1989.
  • University of Toronto, Rotman School of Management, Family Wealth Transfer Study, 2023.