Can You Claim the Principal Residence Exemption on an Ontario Cottage?

Many Ontario families own a home in the city and a cottage. When one of them is sold, the question is whether the profit can be sheltered by the principal residence exemption, and for which years.

The short answer is that a cottage can qualify, but the family generally gets only one designated home each year. This article explains that limit, its exceptions, and how to think about the choice.

Can a cottage be a principal residence?

Yes, it can. A principal residence can be a house, cottage, condominium, apartment, trailer, mobile home or houseboat. A home can still be ordinarily inhabited if you live in it for only a short time in the year, so a seasonal cottage can qualify.

The usual conditions still apply: you own it alone or jointly, you (or certain family members) lived in it at some time during the year, and you designate it. The land that counts is usually limited to half a hectare (1.24 acres) unless more is needed to use and enjoy the home.

One home per family each year

For 1982 and later years, a family can designate only one home as its principal residence for each year. This is the key limit when a family owns both a city home and a cottage.

That means you choose, year by year, which property is designated. Whichever property is not designated for a year may carry a taxable gain for that year when it is eventually sold. If a property was not your principal residence for every year you owned it, only part of the gain is exempt, using the formula of gain × (designated years + 1) ÷ years owned.

Which property to favour depends on how much each has grown in value and how long you have owned each. An accountant can run the numbers before you sell either one.

Exceptions to the one-home rule

• Separated spouses: a spouse or common-law partner is not part of your family unit if, throughout the year, they lived apart from you and were separated under a judicial separation or a written separation agreement.
• Older years: under the pre-1982 rules, a family could designate more than one home per year. Common-law partners could designate different homes from 1982 to 1992.
• Plus 1 rule: in the year you change homes, you can treat both the home you sold and the home you bought as eligible, if you are resident in Canada during the year you buy the new one.

If the cottage is rented

If the main reason for owning a housing unit is to earn income, it is generally not treated as ordinarily inhabited when the owner lives in it for only a short time in the year. A cottage that is mostly a rental business may therefore not qualify.

If you rent only part of a property, you split the selling price and adjusted cost base between the two uses on a reasonable basis, and only the gain on the income-producing part is reported. The CRA generally keeps full treatment where the rental use is ancillary, there is no structural change, and no CCA is claimed.

If you begin renting a property you previously used as your home, you are treated as having sold it at fair market value and bought it back at the same amount, unless you elect otherwise. The election lets you designate the home for up to four years while it applies, and you cannot claim CCA on it.

What to do next

• Write down the years you owned the house and the cottage, and how each was used.
• Note any years of rental use or periods when a spouse lived apart under a separation.
• Estimate the gain on each property with an accountant before choosing a designation.
• Report the sale on Schedule 3 and complete Form T2091(IND) for the property you sell.
• Have an executor use Form T1255 instead if the owner has died.

Frequently asked questions