Part of the joy of living well is owning a second home--that cottage by the water or in the mountains. The kids still love it. So do you. The longer you have owned it, the greater it's potential value. When you die, Canada Revenue Agency (CRA) figures that appreciation as your capital gain, and the tax is levied. The tax trap is if you have too little cash to pay your tax bill, CRA may require the cottage (and other assets) be liquidated to raise the cash. The money is due when your final tax return is filed.

A solution is available if your intent is to keep the family cottage in the family, and make sure it's affordable. Consider the following strategies with your financial advisors.

1. Transfer the cottage to your children right now. Most people start here. They should also consider two cumulative pitfalls that accompany this strategy. First, you cannot sell it off to your children for a song. CRA will claim that you sold if at fair market value, and then tax appropriately. Second, your children establish their cost basis on the selling price (the lower value you tried to use), so their eventual capital gains will be that much higher!

2. Establish a Cottage Trust. Unlike a testamentary trust, which takes effect when you die, this is an intervivos or living trust. Trusts are popular because they provide you with control over the assets, which are distributed to the beneficiaries at some future time. Intervivos trusts are usually flexible so you will not have to make any final decisions now.

3. Make the Cottage your Principal Residence. If your cottage has appreciated more than your home, this might make good sense for you. This shelters the full amount of future gains if you transfer ownership to a family member now, or favourably increase the adjusted cost base of the cottage, thus reducing the taxable capital gains when you sell the cottage or die.

4. Insure the funding of the final tax on the cottage. Joint and Last-to-die Life Insurance can serve a special purpose here. When a couple buys it, the benefit will be paid on the second death. That is when the taxes will be due. Each spouse wills the cottage to the other. When the surviving spouse dies, the insurance benefit is paid to the beneficiary or the estate, providing the cash needed to pay the tax bill. The cottage itself is left to the children in the will.

Cottage season is in full swing. The Labour Day weekend is within sight. Enjoy your time away from the city but remember that CRA owns a portion of your property. Do what you can to ensure enjoyment for generations to come.