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Capital gains and cottage ownership – what you need to know

Wednesday September 28, 2022

Fall can be a busy season for cottage buying and selling. Many cottagers put their properties on the market after enjoying one last summer, and many purchasers delay their search until the fall in hopes of getting a better deal. Whether you are considering buying a cottage, or you already own one that you will eventually sell or leave to your children, it’s important to be aware of a potentially significant tax issue: capital gains and cottage ownership.

Capital gains tax
Unless your cottage qualifies for—and you elect to claim—the principal residence exemption (more on this later), capital gains tax will be triggered when you sell your cottage for more than its adjusted cost base (ACB). Similarly, as a secondary residence, if you plan to transfer the cottage to your children, it will be considered to have been sold to them at fair market value (FMV) on the date of the transfer.

ACB = the original purchase price of the property + any expenses paid to acquire the property (commissions, legal fees, inspections, utility connections, land transfer tax, survey, title insurance etc.) + the cost of any properly documented, qualifying capital improvements + any costs associated with selling (if applicable)

The difference between the sale price of the property (or the FMV if ownership is transferred to your children in your lifetime or deemed disposed on your death) and its ACB will be considered a capital gain for income tax purposes—half of which will need to be included in your taxable income. So, if the property value has considerably increased over its ACB since your date of purchase … you may owe considerable capital gains taxes to the CRA.

Note: If you inherited your cottage from someone other than your spouse, your ‘purchase price’ will be the FMV of the cottage on the date you inherited it. This figure can often be obtained by reviewing the final tax return of the decedent.

Luckily, there are ways to minimize these capital gains and offset the capital gains tax:

Make capital improvements to the property
Capital improvements can significantly increase your ACB, thereby reducing the capital gain (and subsequent tax) realized when you either sell your cottage, or when it is deemed disposed on death.

Any renovations that improve a property (versus just returning it to a previous state of repair during your period of ownership) will usually be considered a capital improvement and will add to the ACB of the property. Here are some examples:

  • Repairs and maintenance made to a property that was acquired in a state of disrepair—such as replacing a roof, replacing broken fixtures, fixing plumbing, or replacing damaged flooring.
  • Renovations that create something that wasn’t previously there—such as adding a new room, finishing a basement, building a new deck or dock, or replacing an old deck or dock with a larger one.
  • Upgrading the property—such as installing better quality windows and doors, flooring and panelling, lighting, or bathroom or kitchen fixtures.
  • Improvements to the land—such as new septic system, a new well, building a driveway, or correcting a drainage problem.

Note: It is very important to keep complete and accurate records in case the CRA asks you to support the ACB of your property. This includes all of the original purchase documentation plus any invoices, receipts or proof of payment related to capital improvements.

Note: Although you can’t include the cost of your own labour for a DIY improvement, you can include the cost of materials.

Principal Residence Exemption
If you’re selling, and your cottage has gained in value more than your family home, you may want to consider claiming it as your principal residence. Currently, every family in Canada is allowed to claim one property as their principal residence for any given year—and this residence is exempt from capital gains tax. As long as you reside in it for a part of the year, even a seasonal cottage can be deemed your principal residence. That said, it’s important to note that this may trigger capital gains on your family home for every year it is not deemed your principal residence.

The concept to remember is to protect the property with the highest value gain per year of ownership. This declaration of the use of the principal residence exemption is made in the year that you sell a property, and you designate the years that you want to protect. Make sure that you speak with your accountant or financial advisor and crunch the numbers before claiming your cottage as your principal residence.

Note: You may lose the option of claiming your cottage as your principal residence for any years when is used primarily as a rental property.

Invest in life insurance
If you are planning to leave the cottage to your kids, but worry about the tax burden they will inherit with it, you may want to consider purchasing life insurance specifically for this purpose. While it won’t eliminate the tax bill, it can provide the cash to pay it. If you have a spouse, joint ‘last-to-die’ coverage will pay a death benefit on the last death, which can then be used to pay the capital gains taxes or any other expenses associated with your estate.

Make your children co-owners
Making your children co-owners of the cottage may allow you to save and defer capital gains tax. If the cottage has increased in value since you acquired it, on the day of the transfer a capital gain (at FMV) would be triggered only on the portion of the cottage your children now own. That tax would be paid now. On your death, your kids would only pay tax on the capital gains incurred on your portion of the cottage. Non-arm’s length transfers are deemed to take place at FMV in the Income Tax Act.

Gift It Now
If (and only if) you are confident that your cottage will rise in value, another option would be to gift the cottage to your kids now. In this scenario, you would only need to pay tax on any capital gains incurred up until the date of the transfer. The possible risk is that you may pay more now than would be due at a future date if the value of the cottage decreases. Make sure you think through the change of legal control issues.

Establish a Trust
Transferring your cottage to an inter-vivos (living) trust is another option to consider if you want to gift ownership to your children now (as beneficiaries of the trust), while still retaining control and management of the property. It is important to note that in addition to any capital gains paid on the date the cottage is transferred to the trust (at FMV), there would also be a deemed disposition of the property at its FMV every 21 years, with tax due on any accrued gain if the trust still owns the property.

S+C Partners is committed to helping you
If you own or are planning to own a cottage (or other vacation property) in Canada, it’s a good idea to get out in front of any potential tax or estate planning considerations so you can enjoy your property with peace of mind in the years to come. Our dedicated tax team and fully qualified and experienced Trust and Estate Practitioners are here to support you. Please call us at 905-821-9215 or email us at if you have any questions or require any assistance.

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