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Cottage and Vacation Property Taxes in Canada

Updated

A cottage raises a tax question at each stage: buying it, renting it out, choosing which home to shelter with the principal residence exemption, and passing it to family. This page covers each, with figures computed from the current rules. It is part of WealthNorth’s real estate tax guide; the exemption itself is explained in the principal residence exemption guide, and family succession options in cottage succession planning.

Selling a cottage: the capital gain

Guide T4037 lists a cottage as personal-use property: items that you own primarily for the personal use or enjoyment of your family and yourself. It includes all personal and household items, such as furniture, automobiles, boats, a cottage and other similar properties. The gain is worked out like any capital gain: subtract the total of your property's ACB, and any outlays and expenses incurred to sell your property, from the proceeds of disposition, and 50% of it is added to your income. With personal-use property, you report any gain when you sell it, but generally can't claim a loss.

What goes into the cottage’s cost

The adjusted cost base is the cost of a property plus any expenses to acquire it, such as commissions and legal fees. It also includes capital expenditures, such as the cost of additions and improvements to the property. You cannot add current expenses, such as maintenance and repair costs, to the cost base of a property.

Example: tax on a cottage sale

All figures in this example are assumptions for illustration. The cottage was bought for $200,000, with $50,000 of later additions and improvements, and sells for $800,000 with $35,000 of selling costs; the seller lives in Ontario, has $100,000 of employment income that year, and the principal residence exemption isn’t used on the cottage .

ItemAmount
Sale price$800,000
Selling costs$35,000
Adjusted cost base (purchase price plus improvements)$250,000
Capital gain$515,000
Taxable capital gain (50% inclusion)$257,500
Extra federal and Ontario income tax (2026 rates)$124,849

The tax figure comes from the site’s tax model, which includes the Ontario surtax and the Ontario Health Premium; the capital gains tax calculator works with your own figures.

Designating the cottage as your principal residence

A cottage can be a principal residence: the CRA’s list of housing units that qualify is a house; an apartment or unit in a duplex, apartment building or condominium; a cottage; a mobile home; a trailer; or a houseboat. The gain on a home is tax-free for each year you designate it as your principal residence: you or your family must have ordinarily lived in it that year, a family can designate only one home a year, and you report the sale on Schedule 3 and Form T2091; the exempt share is the years designated (while resident in Canada), plus one if you were resident in the year you bought it, divided by the years owned. The conditions in full are in the principal residence exemption guide.

Because a family designates one home a year, a family that owns a house and a cottage chooses, when it sells, which property each year goes to. Comparing each property’s gain per year owned is one way to see where the designation shelters more.

Example: a house and a cottage

A family owned its house for 16 years (gain $400,000) and its cottage for the last 11 of those years (gain $330,000), was resident in Canada throughout, and sells both in the same year. The “plus one” in the formula is 1 extra year.

ItemHouseCottage
Years owned1611
Gain$400,000$330,000
Gain per year owned$25,000$30,000
Option A: house designated 15 years, cottage 1 year: exempt gain$400,000$60,000
Option B: house designated 6 years, cottage 10 years: exempt gain$175,000$330,000

The exempt fraction is (years designated + 1) divided by years owned, and can’t be more than the whole gain. In total, option A shelters $460,000 and option B shelters $505,000, a difference of $45,000 in this example, because the cottage gained more per year. Both options use each of the 16 years once, which the one-home-a-year rule requires. You designate the years on Form T2091(IND) when you report the sale.

Renting out the cottage

Rent from a cottage is reported on Form T776; see how to report rental income.

PointRule
Personal useOn Form T776 you enter the part of each expense that was for personal use under "Personal portion of total expenses"
Expecting a profitYou cannot claim the expenses for renting part of your property if you have no reasonable expectation of making a profit.
Rental or businessRenting space with only basic services (heat, light, parking, laundry facilities) is rental income; providing additional services such as cleaning, security and meals may make it a business, and the more services you provide, the more likely it is.
Short stays and GST/HSTStays of less than one month that cost more than $20 a night are taxable for the GST/HST (long-term residential rentals are exempt): a host registered for the GST/HST charges it on their own stays, and for hosts who aren't registered, a platform such as Airbnb charges and collects it on the stays it books.
Capital cost allowanceCapital cost allowance (CCA) is optional and is worked out after combining the net income or loss of all your rental properties: it can bring that net rental income down to zero, but it can't create or increase a rental loss.
CCA when you sellIf the proceeds from the property you sell are more than the undepreciated capital cost (UCC) of its class, the difference is recaptured CCA, added to your income in full rather than at the capital gains inclusion rate.

Short-term rental rules are covered in more detail in short-term rental tax in Canada.

Passing the cottage to family

SituationRule
The owner diesCapital property (such as real estate, investments, or personal belongings) owned by the person who died is considered to be disposed of by that person immediately before their death at fair market value, and may result in a capital gain or a capital loss which must be reported on Schedule 3 of the final return.
Principal residence at deathThe legal representative designates it on Schedule 3 and Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual
The cottage goes to a surviving spouseCapital property, including a rental property or company shares, that passes at death to a spouse or common-law partner resident in Canada, or to a qualifying spousal trust, is transferred at its tax cost (adjusted cost base, or for a building the lower of its capital cost and undepreciated cost), so no gain or recapture is taxed until the spouse sells, unless the executor elects out.
Someone else inherits itGenerally, when you inherit property, the property's cost to you is equal to the deemed proceeds of disposition for the deceased person. Usually, this amount is the FMV of the property right before the person's death.
You give it to a child while aliveIf you give capital property as a gift, you are considered to have sold it at its FMV at the time you give the gift. For the child: If you receive property as a gift, you are generally considered to have acquired the property at its fair market value (FMV) on the date you received it.
You sell it to a child below its valueIf you sell property to someone with whom you do not deal at arm's length and the selling price is less than its FMV, your selling price is considered to be the FMV. The guide adjusts a related buyer’s price only in the other direction: if you buy property from someone with whom you do not deal at arm's length and the purchase price is more than the FMV, your purchase price is considered to be the FMV.
You give it to your spouse while aliveThe attribution rules apply: When your spouse or partner sells that property, you usually report the capital gain or loss, if at the time of the sale you are resident in Canada and still together.

Guide T4037 also says you should keep a record of the fair market value of the property on the date you inherit it, receive it as a gift or change its use. Planning options such as joint ownership, trusts and life insurance are compared in cottage succession planning.

A vacation property outside Canada

Canadian residents report specified foreign property on Form T1135 when its total cost is more than $100,000 at any time in the year. On a vacation home, the CRA’s T1135 questions and answers say: “No, you do not have to report personal-use property. This includes vacation property that you use primarily as a personal residence.” A foreign property that is mainly rented out is not personal-use property and counts toward the threshold.

A Canadian cottage sold by a non-resident

Under section 116 of the Income Tax Act, unless the CRA issues a certificate of compliance, the buyer can be liable for 25% of the price (50% for depreciable property, such as a rental building). The seller notifies the CRA on Form T2062 before the sale or no later than 10 days after it (CRA Information Circular IC72-17R6). More is in the non-resident tax guide.

Records to keep

Keep records for six years from the end of the last tax year they relate to. For a cottage, those records include the purchase documents and the invoices for the additions and improvements that make up its cost.

Sources

The figures and rules on this page come from these sources, last checked against them between September 23, 2026 and October 1, 2026. How we check facts.