Do I Have to Pay Tax on the Sale of My Cottage?
Am I required to pay tax on the sale of a cottage ?
As mentioned in our recent article regarding the sale of your home you and your spouse are only permitted to designate one property as your principle residence each year which will determine whether you are required to pay tax on the sale of a cottage. The principle residence exemption relieves you from any tax on the capital gain realized on the sale of your property. That said, if you and your spouse/common-law partner choose to designate your cottage as your principle residence instead of your home, you will not be required to pay tax on the capital gain realized on the cottage’s sale. Essentially, you are entitled to choose your designated real property.
Tax planning opportunities are available here; it may be advantageous to designate your cottage as your principle residence if the
gain from the sale of the cottage will be greater than the gain from the sale of your home. This will occur if you purchased your cottage many years prior to your existing home at a low cost which has dramatically increased in value over the past 6 years during the real estate boom.
You will be able to take advantage of the principle residence exemption in respect of your cottage if the following conditions are met:
- You own the cottage alone or jointly with another person;
- You or certain family members ordinarily inhabit the property at some point during the year (as this is your cottage, your or your family member will be considered to ordinarily inhabit the property even if it is only used as a vacation property during the summer);
- You report the sale and designate the cottage as your principle residence on Schedule 3, Capital Gains (or Losses), of your T1
- You must also complete Form T2091, Designation of a Property as a Principle Residence by an Individual, after the sale of your cottage
Caution – Consult Your Tax Advisor
The circumstances become more complex where the cottage is owned jointly with several family members. As always, it is important to consult your tax advisor or lawyer to determine if you can claim the principle residence exemption on your property of choosing.
-Julian Franch, Associate Lawyer
© Kalfa Law 2018
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.