Declaring your vacation property a principal residence

ByRobert Ciprick and Mike Thomas

Why read this: CRA treats cottages, cabins, chalets or other vacation properties differently than principal residences, but with a bit of forethought, you can trim your tax bill. 

If you own vacation properties in Canada: Do you rent out the property? Are you selling the property?

Report rental income: If you rent out the property, complete form T776: Statement of Real Estate Rentals.

  • Deduct expenses, such as rental advertising and general maintenance. 
  • Enter gross income from Line 8229 of the T776 on Line 160 of your return. 
  • Enter net income from Line 9946 of the T776 on Line 126 of the return.

TIP >> If you rent the property out for part of the year, claim a pro-rated amount of utilities and property taxes. 

Report the sale of the vacation property

Upon sale, reduce your tax bill by claiming capital improvements you made to the property. Calculate the property’s adjusted cost base by adding the cost of capital improvements to the purchase price of the cottage. CRA generally considers vacation homes to be personal-use property. 

Complete Part 7 of Schedule 3: Capital Gains (or Losses). But if the property was primarily used for rental income, complete Part 4 of Schedule 3 instead.

What's a capital expense?

  • A capital expense:
  • gives a lasting benefit or advantage;
  • improves the existing property;
  • is a separate asset or is considerable in relation to the value of the property.

Source: CRA

Warning >> If you make required capital improvements, like fixing the roof before you decide to sell, CRA says these are current expenses. If these repairs are a condition of sale, they’re capital expenses.

Even if you own a home, you can use the principal residence exemption (PRE) on the cottage to avoid paying capital gains tax when you sell. But there are two caveats. Firstly, the property can’t be used primarily for rental income. Secondly, once you've designated your cottage as your principal residence and you sell it, for the period that you owned both your house and your cottage, you can no longer claim your house as a principal residence. 

Say you bought your home in 1990, and a cottage in 1995. This year, you sell the cottage and claim the PRE. Next year, you sell your home. When reporting the home’s sale to CRA, you can only claim the exemption on gains made between 1990 to 1995, and then after you sold the cottage. You’ll pay capital gains tax on one of the properties for the period you owned both.

To use the exemption most efficiently, calculate the potential gains on both the cottage and the house, and leave the exemption for the property with the higher potential tax bill.

Credits and extras

For more on capital expenses read CRA’s guide, 'Current Expenses or Capital Expenses.' 

 

Michelle Annette TremblayComment