Own a cottage? The tax bill arrives when you sell or pass it on.
A cottage can be tax-free to sell, but only for the years you designate it. Here is how the choice works and when the family gets caught out.
How it works, in three steps
- 1A cottage can be a principal residence. The CRA treats a cottage as a housing unit that can be designated. But for each year, only one property per family can be designated. A family means you, your spouse or partner and your minor children.
- 2If you own a home and a cottage, you choose. For each year you own both, only one gets the exemption. The gain for the years the other property is not designated is a taxable capital gain.
- 3Gifting or passing it on can trigger tax. Giving a cottage to a child is treated as a sale at fair market value. At death, property is generally treated as sold just before, unless it goes to a spouse, where the gain can be deferred.
You report the sale and the designation on your tax return in the year of the sale, so the decision is made then, with the years laid out side by side.
A simple example
You bought a cottage for $200,000 and it is now worth $500,000. The gain is $300,000. If you designated it as your principal residence for every year you owned it, there is no tax.
If none of those years are designated, half the gain, $150,000, is taxable. In a 40% bracket that is about $60,000, and a gain this large can push you into higher brackets, so it may be more. The figures are round numbers for illustration.
Does this apply to me?
It applies if you
- Own a home and a cottage
- Own a family cottage you might one day gift or leave to your children
- Are planning to sell one of two properties
Look further if you
- Rent the cottage out, where the rental property guide applies
- Owned it for less than a year before selling, where the flipping rule can apply
- Hold it through a trust or a corporation
The honest catches
- The choice is yours, so plan it. Selling the home first can use up years you might have wanted for the cottage, so compare both before you sell either.
- Keep records. Purchase documents and the cost of improvements set your cost base.
- Family transfers are complicated. Estate and family-trust planning goes beyond this page. Talk to an accountant before you gift or bequeath a property.
This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.
Estimate the tax on a cottage gain
Enter the gain on the years that are not exempt, with your income and province, to see the tax.
Open the Capital Gains Tax Calculator