Do you pay capital gains tax when you sell a cottage in Canada?

Usually yes. Unlike your principal residence, a cottage is typically subject to capital gains tax on the profit when sold. 50% of the gain is added to your income. However, you can designate a cottage as your principal residence for some years.

Can a cottage be your principal residence for tax purposes?

Yes, but only for years you don't claim another property. You can only have one principal residence at a time. The designation is made on a per-year basis and can apply to whichever property had the largest gain for that year.

What happens to cottage taxes when parents pass away?

The cottage is deemed sold at fair market value at death, triggering capital gains tax in the deceased's final return. The gain since acquisition (or 1972 valuation day) is taxable unless the principal residence exemption applies.

Cottage & Vacation Property Taxes Canada

Capital Gains Tax Basics

How It Works

Sale Price	$800,000
Original Cost	$200,000
Improvements	$50,000
Adjusted Cost Base (ACB)	$250,000
Capital Gain	$550,000
Taxable Portion (50%)	$275,000
Tax (at 45% bracket)	~$123,750

June 2024 Capital Gains Inclusion Change

Gain Amount	Inclusion Rate
First $250,000	50%
Above $250,000	66.67%

Updated Example

Same Scenario
Capital Gain	$550,000
First $250K × 50%	$125,000
Remaining $300K × 66.67%	$200,010
Total Taxable	$325,010
Tax (at 45%)	~$146,255

Principal Residence Exemption (PRE)

The Rules

Key Points
One PRE at a time	Per family unit
Designate per year	Choose which property
Maximize benefit	Designate higher-gain years

PRE Formula

Calculation
Formula	(1 + Years Designated) ÷ Years Owned × Gain
Result	Exempt portion of gain

Example: Two Properties

Scenario
Own house	2010-2025 (15 years)
Own cottage	2015-2025 (10 years)
Selling house	Gain $400,000
Selling cottage	Gain $200,000

Option 1: Designate House 15 Years
House exemption	(1+15)/15 = 100% exempt
Cottage exemption	0 years designated = 0%
Cottage gain taxable	$200,000

Option 2: Designate Cottage 10 Years, House 5 Years
House exemption	(1+5)/15 × $400K = $160K exempt
Cottage exemption	(1+10)/10 × $200K = 100% exempt
House gain taxable	$240,000

| Best Strategy | Depends on relative gains |

Strategic Designation

Strategy
Don’t designate annually	Choose at sale
Track all gains	Know each property’s gain
Compare scenarios	Before selling
Consider timing	Future gains matter

Purchasing a Cottage

Tax Considerations

Factor	Note
HST/GST	Only on new builds
Land transfer tax	Applies
Legal fees	Not deductible
Inspection	Not deductible

Track Your ACB

Add to Cost Base
Purchase price	Original cost
Land transfer tax	Part of ACB
Legal fees	On purchase
Major improvements	Capital additions

Don’t Include
Repairs	Deduct if renting
Maintenance	Not capital
Furniture	Separate property

Rental Income

If You Rent Your Cottage

Report
Rental income	All rent received
Deductions	Expenses, prorated
CCA	Optional depreciation

Deductible Expenses

Expense	Deductible Portion
Property tax	Days rented ÷ total days
Insurance	Prorated
Utilities	Prorated
Maintenance	Prorated
Management fees	100% if rental only
Advertising	100%

Personal Use Impact

Example
Weeks rented	12
Weeks personal use	8
Weeks vacant	32
Total	52 weeks

Calculation
“Rental use”	12 ÷ (12+8) = 60%
Deductible expenses	60% of total

CCA Trap

Warning
If you claim CCA	Cottage may lose partial PRE
CCA recapture	Taxed at sale
Usually better	Skip CCA, preserve PRE option

Inheritance and Death

Deemed Disposition

At Death
Cottage deemed sold	At fair market value
Capital gains triggered	On final tax return
Estate pays tax	Before distribution

Spousal Rollover

To Spouse
Transfer at ACB	No immediate tax
Spouse inherits	Original cost base
Tax postponed	Until spouse sells/dies

Not to Spouse

To Children
Deemed sale at FMV	Tax in final return
Children’s ACB	FMV at death
Double inclusion	If also losing PRE

Planning Strategies

Strategy	Benefit
Designate cottage for more years	Reduce gain
Life insurance	Cover tax bill
Family trust	Complex planning
Sell before death	Control timing
Joint ownership	Partial step-up

Selling Your Cottage

Tax Reporting

T1 Schedule 3	Capital Gains
Report	Proceeds, ACB, gain
T2091	Principal residence designation

Documents Needed

Keep Records
Original purchase	Agreement, statement
Improvements	Receipts, contracts
Sale documents	Agreement, statement
Annual costs	If rented

Gifting to Children

Gift During Lifetime

Tax Impact
Deemed sale at FMV	You pay tax on gain
No gift tax	Canada doesn’t have
Child’s ACB	FMV at gift

Sale at Below FMV

Scenario
Sell to child at $200K	Below FMV
FMV is $500K
Your gain	$500K - ACB (use FMV)
Child’s ACB	Only $200K (paid price)
Result	Worst outcome—tax on $500K, child inherits lower ACB

Better Options

Method	Outcome
Gift at FMV	Pay tax, child gets FMV ACB
Sale at FMV	Same as gift, get cash
Hold until death	Spouse rollover possible
Trust structure	Complex, needs advice

Cross-Border Cottages

US Cottage Owned by Canadian

Issue
US estate tax	May apply over threshold
US income tax	On rental income
FBAR reporting	If >$10K US accounts
Canadian reporting	Foreign property T1135

Canadian Cottage Owned by Non-Resident

Issue
Rental income	25% withholding
Sale	25% withholding (or clearance cert)
Empty home tax	Some municipalities

Provincial Considerations

Property Taxes

Province	Note
Ontario	Separate cottage property class
BC	Different vs residential
Quebec	Welcome tax + annual

Vacant Land Taxes

New Rules
Some areas	Speculation/vacancy taxes
Vancouver	Empty homes tax
Toronto	Vacant home tax
Check locally	Rules vary

Record Keeping

What to Keep

Document	Duration
Purchase documents	6 years after sale
Improvement receipts	6 years after sale
Rental records	6 years after tax year
Sale documents	6 years after sale