Tax implications of owning a cottage or second home
Income Tax Act s. 40(2)(g)(iii), 54
A cottage, or second home, is considered personal-use property, if it is
used primarily for the personal use or enjoyment of
the taxpayer,
individuals related to the taxpayer, or
where the taxpayer is a trust, a beneficiary under the trust or any person
related to the beneficiary
There is no deemed disposition if a person moves into their cottage,
so no tax will be payable as a result of this move. However, if the use
of the property changes from personal use to being used for the purpose of
gaining or producing income, such as a rental property, there is a deemed
disposition. See our article on change
in use of real estate.
When a cottage is sold, tax is payable on any
capital gain, less any principal
residence exemption. If there is a capital loss, the loss is
not deductible, because losses on personal-use property are not deductible.
It is important to keep a record of the adjusted
cost base of both the primary home and the cottage, to be used to
calculate the gain on sale. If the cottage has been owned since before
1972, only the increase in value since December 31, 1971 is taxable.
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