Capital Gains Tax on Selling a Cottage in Canada: What to Know

A family cottage often rises in value over decades, so selling it, or passing it to the next generation, can produce a large gain. Many owners assume the sale is tax-free, but a second property is treated differently from the home you live in.

This article explains how the gain is worked out, how the principal residence exemption fits in, and the situations where family transfers change the result. It is general information, and a lawyer or accountant can confirm how it applies to you.

This article covers Canadian federal tax law, which applies in every province.

How the gain on a cottage is calculated

You start with the proceeds of disposition and subtract the property's adjusted cost base (ACB) and the outlays and expenses of selling. The ACB is usually the cost of the property plus the expenses to acquire it, such as commissions and legal fees. Current expenses such as maintenance and repairs cannot be added to the cost base.

The taxable capital gain is one-half of the capital gain. If your taxable capital gains exceed your allowable capital losses, the difference goes on line 12700 of your T1 return and is taxed at your marginal rates with your other income, not as a separate flat tax. The one-half rate applies to gains realized in 2024, 2025 and 2026, because the proposed increase was cancelled.

The principal residence exemption and a second property

If you sold, or are considered to have sold, your principal residence or part of it, you include Form T2091(IND) with your return and report the sale on Schedule 3. Since 2016 the exemption is allowed only if the sale and the designation are reported on the return, and a late designation may attract a penalty.

If you own both a home and a cottage, which one to designate, and for which years, depends on your facts. A lawyer or accountant can run the numbers for each choice before you file.

Transfers within the family

• Gift to a child or other person (not a spouse or common-law partner): treated as a sale at fair market value on the date of the gift, so you report a gain or loss.
• Gift to a spouse or common-law partner: generally happens at ACB with no gain or loss, and you can elect out. If the spouse later sells, the gain is generally attributed back to you.
• Sale to a relative below market value: your proceeds are deemed to be fair market value, but the buyer's cost stays the lower price paid, so the same gain can be taxed twice.
• Death: the deceased is considered to have sold capital property, and an heir generally takes it at the deceased's deemed proceeds, usually fair market value just before death. Spousal transfers can be treated differently.

Short ownership and spreading the gain

A gain on a Canadian housing unit owned for less than 365 consecutive days is deemed to be business income, not a capital gain. This does not apply where the sale is due to a qualifying life event, such as death, serious illness, involuntary job termination or relationship breakdown with at least 90 days of separation.

If part of the price is paid after the year of sale, you may be able to claim a capital gains reserve on Form T2017. Most reserves can be claimed for a maximum of four years after the year of sale, so the gain is included in income over five years. You generally cannot claim a reserve if you were a non-resident, were exempt from tax, or sold to a corporation you control.

What to do next

• Find what you paid for the cottage and the legal fees and other costs of buying it.
• Collect the selling costs, such as commissions and legal fees.
• Report the sale in the calendar year it occurs, and file a return even if no tax is owing.
• Decide with an adviser whether to designate the cottage, and complete Form T2091(IND) if so.
• Get advice before gifting or selling to family, or if the cottage is part of an estate plan.

Frequently asked questions