Cottage Owners Tax Planning and Strategies

Cottage Owners Tax Planning and Strategies

There’s something uniquely Canadian about owning a cottage - we love to have them, use them, and sometimes even profit from them.? There are, however, tax implications to cottage ownership.? Here are some of the most commonly asked questions about tax strategies for cottage owners, and some answers to go along with them.

The Rules Around Capital Gains Tax & Principal Residence for Cottage Owners

This applies to when you want to sell your cottage.? Normally, any increase in value on any real estate property is subject to Capital Gains Tax payable at tax time to the Canada Revenue Agency (CRA).? There is, however, an exception which can eliminate or at least reduce any capital gains tax payable; this is known as the principal residence exemption.? If you designate your cottage your principal residence - even if it isn’t used as your primary residence - it will qualify for the capital gains exemption.? Keep in mind that you do have to live at the cottage for part of the year, so that you demonstrate to CRA that the property is not solely used to generate income.

Spouses Who Own Both Cottage and House & the Principal Residence Exemption

The principal residence exemption was at one time a handy loophole for couples to save on capital gains tax, by each listing their own principal residence - one listed their main house, the other the cottage.? This was eliminated except for properties purchased prior to 1982.? These days, a couple will have to make the choice at tax time as to what they consider to be their joint principal residence.? This information must be listed on Section 3 of your Income Tax and Benefit return.? As of 2017, you also have to list this information on Form 2019(IND).? It’s very important to submit and keep this information up to date in order to take advantage of any exemption down the road.

Selling off a Portion of a Cottage Property - Tax Implications

This question frequently comes up.? If a cottage owner owns a sizable property surrounding the cottage, and they decide to sell a portion of the land, are they exempt from capital gains tax?

Again, it comes back to the concept of principal residence and its associated exemption.? It would all depend on the size of the property in question, and whether the portion being sold would be considered as being part of the use and enjoyment of the cottage itself.? The cut-off point is generally considered to be half a hectare or about 1.24 acres - any excess land above this amount would likely not qualify as being part of the cottage lot for use and enjoyment.? If your cottage land is a significant number of acres and you sell a portion of it, unless you can prove to CRA that the land you’ve sold is somehow part of your “use and enjoyment” of the cottage, you will probably have to pay capital gains tax on any increased value you have derived from the land.

Cottage Renovations & Upgrades - Tax Implications

Keep track of all receipts to cottage renovations, such as construction of a new deck, or replacement of its roof, etc.? This information can have tax implications down the road, when the day comes to sell.? Some of this gets a little complicated, having to do with Fair Market Value (FMV) and Adjusted Cost Base (ACB), along with the aforementioned Capital Gain; your accountant will likely have to guide you through the calculations, but it is possible that the improvements and repairs you made to your cottage can help offset some of the tax burden at selling time.

Owning a cottage is a lovely lifestyle advantage we Canadians enjoy, but it does come with some tax implications you should be aware of.? We hope you’ve found this summary useful.? Please feel free to contact us with any questions.

Thanks,

Mahdi Songhori, MAcc

AMACC

[email protected]