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Personal Income Tax -> Cottages and second homes

Tax Implications of Owning a Cottage or Second Home

Income Tax Act s. 40(2)(g)(iii),  s. 54

A cottage, or second home, is considered personal-use property, if it is used primarily for the personal use or enjoyment of

bullet the taxpayer,
bullet individuals related to the taxpayer, or
bullet where the taxpayer is a trust, a beneficiary under the trust or any person related to the beneficiary

Change in Use of the Cottage

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.

Sale of the Cottage / Principal Residence Exemption

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 except for listed personal property (LPP) losses, which can be deducted from LPP gains.

Tracking the Cost of the Cottage

It is important to keep a record of the adjusted cost base (ACB) of both the primary home and the cottage, to be used to calculate the gain on sale, because the principal residence exemption could apply to either property.  If the cottage has been owned since before 1972, only the increase in value since December 31, 1971 is taxable, because taxation of capital gains began with the 1972 taxation year.  December 31, 1971 is the valuation day (V-day) for properties owned prior to that date.

Tracking the Cost of Your Principal Residence

Even if you don't own a second property, the ACB of your home needs to be tracked, because its status as a principal residence could change in the future, for instance if you decide to buy a cottage and at some point want to designate it as your principal residence.

Principal Residence Exemption and the Cottage

See our article on the principal residence exemption for more information on claiming this exemption for a cottage.

Other Resources

December 2020 Life in the Tax Lane video including information on family cottages

Miller Thomson - Passing on the Family Cottage

BDO - Tax Planning Strategies for Cottage Owners

Canada Revenue Agency (CRA) Resources

Line 12700 (line 127 prior to 2019) Capital Gains, which includes information on personal-use property under the link Capital Losses and Deductions

IT232R3 - Losses - Their Deductibility in the Loss Year or Other Years (Archived)

Income Tax Folio S1-F3-C2 Principal Residence

Tax Tip:  Always track the ACB of your home and your 2nd home or cottage!

Revised: March 09, 2022


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