One exception is if a surviving spouse or common law partner inherits the property, then no tax is owed on the transfer of the estate.

Inheriting a secondary residence

In general, however, when a piece of property is bequeathed it may subject to tax, if the property was not a principal residence.

That means if you inherit your parent’s cottage — a vacation home not designated as a principal residence — then the transfer of ownership would be subject to tax. This tax is calculated as if the cottage had been sold at a fair market value.

Under Canadian tax law, the taxes on this transferred cottage property are owed by your parent’s estate (not by the person inheriting the estate).

But, if the estate is cash-poor and property rich, you might find yourself taking out a loan or selling assets in order to come up with the estate taxes owing.

Inheriting a primary residence

On the other hand if the bequeathed property has been a principal residence, your parent’s estate would not be subject to capital gains tax on the disposition of the property.

However, if you were to sell your parent’s principal residence — say, because you already have a home — the sale would be subject to capital gains tax, since you’re selling a piece of property that is not your primary residence.

Sell the house shortly after you inherit and you’ll find the capital gains tax will be nominal, as there will be little difference between the assessed fair market value that was done when you inherited the property and the sale price.

Multiple owners

Of course, all this gets a lot more complicated when you have multiple owners.

Say, for example, your parents leave their primary residence to you and your two sisters. As siblings, you make a unanimous decision to allow the youngest to move into the home and to take out a mortgage to buy out the other two siblings.

Since the youngest now considers the inherited property as their primary residence, they won’t be subject to tax.

The other two siblings, however, would have to pay capital gains tax once the youngest child has moved into the home. That’s because the change in use of the home triggered what the taxman calls a “deemed disposition”— the use of the home has changed, and thus the home is considered to have been sold for tax purposes.

FMV is the key

The best way to determine what’s owed and when is to pay for an independent fair market value (FMV) assessment of the property whenever you anticipate a change in the property’s use.

That means:

• If you plan on selling your parent’s primary residence, you need to get a FMV price, so you can calculate the capital gains you will owe (subtract the sale price from the FMV price and you’ll know how much you’ll owe tax on);
• If you plan on renting out the property, instead of selling, you will also need to know the FMV. Because you are changing the use of the property — from primary residence to investment property — the taxman considers the property sold, for tax purposes. That means, you’ll theoretically owe capital gains tax on the difference between the value of the inherited home and the FMV of the home when you chose to start renting it out.
• If multiple people inherit the home and one child decides to buy out the other siblings, you’ll need to establish a FMV price not only to determine the buy-out price, but also to determine how much tax is owed on the deemed disposition of the property.

An independent assessment of your property should cost no more than $1,000 (and typically starts at $350). Given how much you could save in taxes this fee is a nominal expense.

Situated between the Ottawa River and Georgian Bay, the Sudbury/Lake Nipissing/French River region has more than 300 freshwater lakes and rivers. Lake Nipissing, which drains into Georgian Bay via the French River, is one of the largest lakes in this region and it’s widely considered to be an angler’s paradise.

This region boasts some of the most affordable cottages in Ontario, many of them situated along the river. Just recently, an older cottage with boat access and 140 feet of shoreline on the French River sold for $200,000, while vacant lots two to three acres in size with 300 feet of shoreline fetch about $160,000.

Retirees, young families and people returning from jobs outside of the province are the major purchasers of recreational properties in Nova Scotia. Featuring sandy beaches and a close proximity to Halifax, the South Shore area runs southwest from Halifax Harbour, through the Lunenburg area and the towns of Bridgewater and Shelburne. Dozens of lighthouses and quaint fishing towns with historic streetscapes are scattered all along the shoreline.

Prices for waterfront properties can climb as high as $850,000 in some areas, but according to the Re/Max report, you can find great values in small oceanside communities, where modest cottages can be bought for $120,000. “Things have slowed down considerably this year,” says Bert Price, a realtor with Tradewinds Realty in Chester, N.S. “The lakefront cottages are holding steady in price.”

The more popular lakes include Big Mushamush Lake, Lake Torment, and Fancy Lake. These lakes are within an hour and a half of Halifax and have several picturesque cottages listed for sale between $200,000 and $350,000. Or have a look at some of the cottages located on the South Shore’s many coves, including cottages on Hubley, Hackett’s and South Cove.

“The spectacular panoramic views are very appealing to vacationers looking for a recreational property,” says Monica Sontrop, a real estate agent with Tradewinds Realty in Chester. If you feel inspired to build your own oceanfront paradise, check out the 1.25-acre lots with 240 feet of frontage on Frost Fish Cove, which start at an affordable $265,000. Then roll up your sleeves and build the cottage of your dreams.

This region of more than 20 lakes offers cottagers several options. You can look for a cottage on the northern shores of Lake Superior (the world’s largest lake, but unfortunately too cold for swimming), or you can look for a property on one of the numerous inland lakes in the area, which have warmer waters and shallower bays.

Consider starting your search along the shores of Shebandowan Lake, Lac des Mille Lacs, or Whitefish Lake for some affordable bargains. A recent listing offered a five-acre lot containing two small cottages on the shores of Lac des Mille Lacs for only $190,000.

“It’s a wilderness paradise out here,” says Art Lannon, owner of Royal LePage Lannon Realty in Thunder Bay. “We’re on the edge of daylight savings time and it may surprise first-time cottagers to know that we have daylight from 6 a.m. to 11 pm every day during the summer months.” That’s good news for cottage-goers who like to get the most out of their summer.

In general, the prices in the area are “mainly holding steady” right now, says Wil Salo, a broker/manager at Team 100 Realty in Thunder Bay, “although in some of the smaller communities, prices are down.”

The beautiful Haliburton Highlands, one of the highest points on the Canadian Shield, boasts more than 600 lakes and rivers. It offers great hiking, boating, canoeing and even horseback riding. Bordering on Algonquin Park to the north and the Muskoka region to the west, this area contains the village of Minden as well as the smaller communities of Gooderham and Irondale. “Most people buying a recreational property in this area are looking to use their cottage extensively on weekends,” says Anthony vanLieshout, a broker with Royal LePage/Lakes of Haliburton.

The area is a top choice for Toronto cottage seekers, which may explain why prices are up about 5% over last spring. Some of the larger lakes, like Balsam Lake, Little Cameron Lake and Sturgeon Lake, are prohibitively expensive, with luxury waterfront cottages ranging from $500,000 to $2.2 million. To find the bargains, concentrate your search on the dozens of smaller lakes, such as Raven, Fairy, Red Pine, Kushog, Kennisis, Trooper and Little Hawk. (For instance, a small, three-bedroom waterfront cottage on Trooper Lake was recently listed for $217,000.) “There are some good deals out there,” says Ken Hale Sr., a real estate agent with Sutton Group Future Realty. “Just stay away from the big three lakes.”

If Parry Sound seems familiar, it may be because the area was a popular subject for the many scenic art works of Tom Thomson and members of the Group of Seven. The region is heavily forested, with lakes and rolling hills, and includes hundreds of kilometers of snowmobile trails, as well as good kayaking, canoeing and birding.

The town of Parry Sound is located on the eastern shore of Georgian Bay, and the properties along the bay proper are the most expensive (in the $500,000 and up range). However if you concentrate your search on the inland lakes—Manitouwabing, Whitestone and Harris Lake, for instance—you can find some handsome cottages on the water in the $300,000 to $350,000 range. Cot­tages on smaller lakes, such as Doe Lake and Ahmic Lake, are more affordable still, with properties fetching $220,000 to $300,000.

“We have quite a few cottages for sale on the waterfront this year,” says real estate broker Michael Gerhardt in Parry Sound. For those looking to build, Gerhardt says there are several 120-by-400-ft vacant lots available for construction right on Georgian Bay, selling for just $175,000 each.

The District of 100 Mile House covers more than 2,600 sq km in the central interior of B.C. and is located on Highway 97, the province’s main arterial north-south route. The region has hundreds of lakes that provide some of the best rainbow trout fishing in the world. Log homes are the dominant cottage types, and they are some of the most affordable in British Columbia.

Most buyers are from Vancouver and the Fraser Valley, but there is also a lot of interest from Albertans who are up to the 10-hour drive. Standard waterfront properties sell for an average of $320,000 but they can go for half that much—about $160,000—if you’re willing to go for a nicely treed lot away from the water. The best deals are along the shores of the smaller lakes, including Watch, Crystal, and Eagan lakes.

“It’s definitely a buyer’s market this year,” says Karen Friess, managing broker at ReMax Country Lakes Realty in 100 Mile House. “Sellers are realizing that if they want to sell, they have to drop their price. There’s good selection and lots for sale on the waterfront.”

Of the respondents, 43% said they’d buy a vacation property because it’s a good investment. Last year, 64% of respondents said they’d make the purchase because it’s a good investment. About 25% said they plan to rent out their recreational property for part of the year (up from 13% in 2009).

About 15% plan to purchase a vacation residence with friends or family.