The article “When is capital gains tax due on a cottage purchased in joint tenancy with two other people?” was originally published in Financial Post on February 24, 2023. PHOTO BY JAMES MACDONALD/BLOOMBERG FILES.

RRSP contributions are one way of reducing capital gains tax

Q: “If a cottage is purchased and held in joint tenancy with two other people, when is the capital gains tax due? Is it as each person dies or not until the cottage is sold? And is there any way to avoid — or minimize — paying this tax?” Angelina

FP Answers: To best understand the tax implications of a cottage, we need to understand if a sale or death results in a taxable event. One reason why there may not be tax payable is that an owner may qualify for the principal residence exemption.

If an owner designates the cottage as their principal residence for all years of ownership, there may be no tax. If they own another property, chances are it will be advantageous to claim the exemption on that property instead of the cottage given they only own one-third of the cottage. A cottage can be claimed as your principal residence as long as you ordinarily inhabit it, even if it is not the place where you primarily reside.

Assuming the exemption will not be claimed for the cottage, a sale would generally result in capital gains tax. In addition, if an owner dies, it is as if they sold their share at the current fair market value and a deemed disposition may trigger tax payable for the deceased owner’s estate.

If the property is instead held as joint tenants with right of survivorship, and two of the three owners are spouses (that is, one couple and another person), there may also be a partial tax deferral. If a spouse dies and half of their one-third ownership of the property goes to their spouse and the other half to the other owner, one-half of their capital gain may be deferred. One-sixth of the capital gain would be triggered on their death though based on the current fair market value. In this case, the death of one owner would result in the other two owning one-half of the property each thereafter. The spouse would only be giving one-half to their spouse in this case and the other one-half to the other owner.

The executor of the deceased’s estate would be responsible for ensuring the terminal tax return of the deceased reflects the deemed disposition, and that any tax is paid prior to finalizing the estate. Likewise, if a principal residence exemption is being claimed, this would be reported on the tax return.

Though any tax payable is not a direct liability to the surviving cottage owners, tax implications and other considerations for the deceased owner are likely of interest to the surviving owners. If the capital gains tax is significant, and there are not enough other assets in the estate of the deceased, their beneficiaries may be that much more likely to need to sell their share of the cottage.

Like other transactions that result in taxable capital gains, there are few ways to fully eliminate this tax. Some strategies can be used at death when filing the terminal tax return, but others can also be used during the owner’s lifetime.

Registered retirement savings plan (RRSP) contributions are one way of reducing capital gains tax. If the deceased has RRSP contribution room or unclaimed RRSP deductions, they could use these to offset some or all the tax triggered in the deemed disposition of their share of the cottage. In the case of new contributions, the contributor would need to be less than 72 years of age to make these, because RRSPs are not eligible accounts for people 72 years of age and older.

If the sale of the share of the cottage, or anticipated life expectancy, is after age 71, then using the RRSP prior to this age could provide a unique advantage. For example, in anticipation of the cottage’s sale, an owner can make RRSP contributions in the years prior to 72, but not claim them until later. With a proper overall tax strategy, this could be an effective way to defer as well as efficiently manage tax over the latter stages of one’s life.

Another way to help minimize tax, though not eliminate it, would be to consider gifting assets during the owner’s lifetime so that a portion of the capital gains are triggered by the current owner, while capital growth of the asset over the long term is deferred to the recipient of the gift.

The concept for this strategy would involve one of the three owners gifting (or even selling) their share of the cottage to another owner. This transaction results in a deemed disposition as the owner is considered to have sold their share when they are no longer legal and/or beneficial owners of the property.

The tax payable would be based on the selling owner’s marginal tax rate when they sold their share, but future growth will be based on the marginal tax rate of the recipient owner when they sell their share or pass away themselves. Depending on the expected tax rates for each individual and their potential estates, there could be thousands in tax savings by implementing this strategy.

Here are a few words of caution. Though tax is an important element of financial planning, it should not be the only driver of decisions. In the example above, selling a share of a jointly owned cottage may have negative implications for the other two owners as they may have reservations over having to deal with a new owner on the property.

Also, making major tax-planning decisions based on tax policy and investment assumptions involves a great deal of risk. Tax rates, just like real estate assets, tend to go up over time, but they can go down (in reference to taxes, since the tax-bracket thresholds increase annually, you may pay more tax even if rates go down).

Making investment decisions based on growth may make sense if history is used as a gauge, but past performance is not indicative of future results, as we often hear in finance. Ensure that the plan is sound but be prepared for alternate outcomes and adjust accordingly.

Andrew Dobson is a fee-only, advice-only certified financial planner (CFP) and chartered investment manager (CIM) at Objective Financial Partners Inc. in London, Ont. He does not sell any financial products whatsoever. He can be reached at