Selling a Cottage or Vacation Home in Canada: What to Know

Selling a cottage or vacation home in Canada comes with unique factors compared to selling a primary residence. A cottage is typically a secondary property located in rural, lakeside, or forested areas, serving as a seasonal retreat. Whether referred to as a cottage, cabin, summer house, or simply a vacation home, selling these properties involves careful planning and consideration.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

What to Know Before Selling a Cottage

• Cottages are considered investment properties, subjecting profits from sales to capital gains tax.
• Properties purchased before 1994 may qualify for a $100,000 lifetime capital gains tax exemption, reducing taxable gains significantly.
• Designating your cottage as a primary residence can allow you to claim the principal residence exemption, making sale proceeds generally tax-free.
• Accurate reporting of the sale to the Canada Revenue Agency is mandatory to benefit from available exemptions and avoid unexpected tax liabilities.
• Record-keeping of home improvements and expenses is essential to minimize taxable gains and maximize tax advantages when selling a cottage.

Primary Residence vs. Vacation Property Taxes

While your primary residence may qualify for capital gains tax exemptions, cottages are typically taxed as investments, making their sale subject to higher tax rates. If you purchased your cottage before 1994, you might still be eligible for certain exemptions, so it’s essential to understand these distinctions as you plan your property sales.

Primary Residences Are Exempt

The Principal Residence Exemption (PRE) allows homeowners to avoid paying capital gains tax on the sale of their primary residence. To qualify, the property must be designated as the owner’s principal residence for every year they owned it, and the owner or their family must have ordinarily lived there. This exemption applies only to one property per family unit (which includes spouses and minor children) for a given tax year. 

Importantly, the exemption does not apply to vacation homes or cottages unless they are designated as the primary residence for certain years. Without this exemption, the profit (capital gain) from selling a secondary property becomes taxable, making it a significant factor when planning the sale of non-primary residences.

Cottages Are Taxed As an Investment

Unlike primary residences, which may qualify for tax exemptions, cottages are classified as investment properties. This means that when you sell your cottage, you’ll face capital gains tax on the profit made from the sale. The amount is calculated based on the difference between the purchase price and the sale price of the cottage.

Cottages Purchased Before 1994 Are Eligible For Exemptions

If you purchased your cottage before 1994, you might be eligible for significant tax exemptions that can ease the financial burden when selling. Specifically, you could take advantage of a $100,000 lifetime capital gains tax exemption. This exemption allows you to reduce your taxable gain upon sale.

Vacation Home Tax Deductions

While vacation homes and cottages don’t typically offer the same tax benefits as primary residences, there are still some deductions that owners may claim in certain situations. If the property is rented out part-time or seasonally, owners can deduct expenses like property taxes, utilities, insurance, repairs, and maintenance, proportionate to the rental period.

It’s important to keep detailed records, as income generated from renting the cottage must be reported. Claiming deductions improperly can lead to audits or penalties.

Additionally, interest on a mortgage for the property may be deductible if it generates rental income. However, if the vacation home is strictly for personal use, most expenses are not tax-deductible.

Vacation Home Depreciation Deductions

Depreciation—referred to as Capital Cost Allowance (CCA)—can be claimed on vacation homes and cottages that generate rental income. CCA allows owners to deduct a portion of the property’s cost over time to account for wear and tear. However, depreciation cannot be claimed if the property is used solely for personal purposes.

Even when the property is rented out, owners must be cautious. Claiming CCA reduces the property’s adjusted cost base, which could result in a larger capital gain (and higher taxes) when the cottage is sold. Additionally, CCA deductions cannot be used to create or increase a rental loss for tax purposes.

Can You Convert a Vacation Home to a Primary Residence?

Yes, in Canada, it is possible to convert a vacation home or cottage into a primary residence to potentially reduce capital gains tax through the Principal Residence Exemption (PRE).

If you make the property your primary residence, you can designate it as such for the years it serves that purpose, which may shelter some or all of the capital gains from tax when you sell. However, there are a few key considerations:

1. Designation Limits: You can only claim the exemption for one property per family unit per year, so this strategy is most effective if you no longer own another primary residence or are willing to designate the vacation home as your principal residence for certain years.
2. Change in Use Reporting: When converting a vacation home into a primary residence, you must file an election under Section 45(2) of the Income Tax Act to defer the capital gain from the time of conversion until you sell the property.
3. Deemed Disposition: Filing for a change in use is treated as though you sold the property to yourself at fair market value on the date of the change. This means you must report any gain or loss realized in the year of the conversion. A useful strategy is to make the change during a period of low market value or loss. Then, you can live in the home until its value increases enough to sell at a gain, qualifying for the PRE on that portion of the appreciation.
4. Partial Exemption: If the property was used as a vacation home for part of the ownership period, only the years it was designated as a primary residence will qualify for the exemption, with any remaining portion of the gain still subject to capital gains tax.

This strategy can reduce the tax burden, but it requires careful planning, timing, and compliance with CRA rules.

Primary Residence vs. Vacation Home: Best Time to Sell

Because primary residences and vacation cottages have such different purposes, there may be different peak markets when it comes to the best time to sell your property.

For primary residences, the peak selling time is usually in late spring and early summer. Not only is the weather nice for viewing homes and moving, but homebuyers with children usually aim to be settled before the start of a new school year.

The best time to sell a vacation home is usually during the peak tourist season for the area. For example, winter for a ski town and summer for a beach condo. Homebuyers will have their potential vacation there on the brain, motivating them to offer more.

While selling outside these windows is certainly possible, you’ll typically sell faster and for more money when you sell during the proper season.

Frequently Asked Questions

How Do You Avoid Capital Gains Tax on a Cottage in Canada?

To avoid capital gains tax on your cottage, consider designating it as your primary residence, keeping track of tax deductions and depreciation, or gifting it to family members. Plan ahead to minimize liabilities.

Do You Pay Capital Gains on an Inherited Cottage?

Yes, you pay capital gains tax on an inherited cottage if you sell it for more than what its fair market value was at the time of inheritance.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

What to Keep in Mind When Selling a Cottage

When selling a cottage in Canada, understanding the tax implications is crucial. If your cottage is classified as an investment, you may face capital gains tax on profits. Plus, if you’re considering converting a vacation home to a primary residence, be aware of the tax rules that may apply.