All the Numbers

Selling or giving a cottage

From the All the Numbers wiki · Housing

A cottage can be your principal residence

A cottage counts as lived in for a year even if your family is there only a few weeks of it.[1] But only one home per family can be the principal residence in any year, so a family that owns a home and a cottage at the same time must choose, home by home and year by year. The choice is made on the tax return for the year the first of them is sold.[2]

How All the Numbers splits the years

The exempt part of a gain is the gain × (1 + years designated) ÷ years owned, as for any home. A year spent on a home is worth that home's gain ÷ the years it was owned, so All the Numbers gives the shared years to the home with the larger expected gain per year, until it is fully exempt with one year less than it was owned. The one year left over goes to the other home at no cost to the first. The gains are projected at each home's appreciation rate to its sale or the plan's end. For a home you already own whose purchase price the plan did not ask, only the gain from today is known, so it is spread over the years from today, not over every year owned.[3] You can set the number of years the cottage takes instead; the home you live in keeps the rest.

A cottage that also earns rent

A home owned mainly to earn rent is not lived in for this purpose, but incidental rent does not change that.[4] So a rented cottage takes years of the exemption only when you say your family lives there part of each year and the rent is incidental; without that it takes none.[5] See renting out a cottage.

Giving it to a child

A gift, or a sale to a family member below market value, is taxed as a sale at market value. On a sale below market value the child's cost stays the lower price, so the same gain is taxed again when the child sells; a gift gives the child a cost of the market value.[6] All the Numbers therefore offers a gift, taxed as a sale at the cottage's projected value with no selling costs and the mortgage paid from your cash, and does not offer a sale below market value.[7]

Not modelled

  • Death, the executor's designation and probate.
  • The capital gains reserve on a sale paid over several years.
  • Joint ownership with a child, and cottage trusts.
  • What the gift costs the child: any land transfer tax and the legal fees are the child's, so the plan, which follows your household's money, leaves them out. If you will pay them, add them as a "One-time cost" in that year.

See also

  • Buying a cottage · A cottage is a second home for you and your family, kept alongside the home you live in. It can be bought with as little as 5% down if it is usable all year, or 10% if it is seasonal, but first-time buyer help, the Home Buyers' Plan and the FHSA cannot pay for it.
  • Renting out a cottage · Rent from a cottage you also use is taxable. Its shared costs and mortgage interest are deductible only for the weeks it is rented, a loss offsets other income only when it is run as a business, and a short-term rental may need a licence where it is.
  • Selling a home · A sale turns the home's projected market value into cash after selling costs (your province's typical commission, the sales tax on it and legal fees) and the mortgage payout. The gain on a principal residence is exempt from tax, apart from the part that was rented out when the exemption does not cover it.

References

  1. ↑Income Tax Folio S1-F3-C2, Principal Residence · A housing unit (a cottage included) is ordinarily inhabited in a year even if lived in only for a short period, unless owned mainly to earn income · effective 1972-01-01
  2. ↑Income Tax Folio S1-F3-C2, Principal Residence · The designation is made on the return for the year of disposition (Schedule 3 and Form T2091(IND); T1255 by a legal representative); a late designation is accepted at the Minister's discretion and a penalty may apply · effective 2016-01-01
  3. ↑Our convention under ITA 40(2)(b) (Folio S1-F3-C2 ¶2.20, ¶2.28) · When a family owns a home and a cottage in the same years, the years of the principal residence exemption are suggested by each home's expected gain per year owned (projected at its appreciation rate to its sale or the plan's end), each taking the years less one that make it fully exempt and leaving one shared year to the other through the +1; the household may set the cottage's number of years · effective 2026-10-12
  4. ↑Income Tax Folio S1-F3-C2, Principal Residence · A housing unit owned mainly to earn income is generally not ordinarily inhabited when lived in only briefly; receiving only incidental rental income does not make it owned mainly for income · effective 2019-03-19
  5. ↑Our convention under Folio S1-F3-C2 ¶2.11 and ¶2.59 · A cottage that earns rent may take years of the principal residence exemption only when the household says the family lives there part of each year and the rent is incidental; then the whole cottage keeps the exemption for those years · effective 2026-10-12
  6. ↑Guide T4037 Capital Gains 2025 — Other transfers of property · A gift, or a non-arm's-length sale below fair market value, is deemed a sale at fair market value; on a sale below it the buyer's cost stays the price paid, so the gain is taxed twice; a gift gives the recipient a cost of fair market value (69(1)(c)) · effective 1972-01-01
  7. ↑Our convention under ITA 69(1)(b) (T4037 "Other transfers of property") · A cottage given to a child is taxed as a sale at its projected market value with no selling costs, and the mortgage is paid off from the household's cash; a sale to a child below market value is not offered · effective 2026-10-12