Do I owe capital gains tax when I sell my cottage in Ontario?

A cottage or recreational property you sell for a profit triggers a capital gain under the federal Income Tax Act. The taxable portion of that gain flows through your personal income tax return for the year of sale.

However, a cottage can sometimes qualify as a principal residence for years in which it was your "ordinarily inhabited" dwelling, even if you also owned a city home. Under the federal Income Tax Act, a family unit can only designate one property per year as a principal residence. So if you owned both a cottage and a home, you must allocate the exemption years strategically across the two properties to minimize your overall tax. This is called the "one-plus rule" calculation, and getting it right requires care.

CRA has scrutinized situations where taxpayers claim both a home and a cottage qualify, so documentation of actual use is important. Gifts or transfers of a cottage to family members, or inheritance by an estate, can also trigger a deemed disposition at fair market value. A tax accountant should model the scenarios for you before any transfer or sale is completed.