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Cottages or Second Homes

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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

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

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, 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.

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.

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

Canada Revenue Agency (CRA) resources:

bulletLine 127 Capital Gains, which includes information on personal-use property under the link Capital Losses and Deductions
bulletIT232R3 - Losses - their deductibility in the loss year or in other years
bulletIncome Tax Folio S1-F3-C2 Principal Residence

Revised: March 14, 2017

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