How Much Will I Owe in Capital Gains Tax if I Sell My Cottage?

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When you and your family decide that it is time to pack up the bug spray, sunscreen and bathing suits and list your family cottage you may have a lot of questions.  Like, who gets to keep the water wings? Where did your favourite blue bathing suit go? And, who wants to help use up the last of the fire wood and marshmallows?

There’s also a good chance that you’re going to have a few questions for your local REALTOR®.

Such as “What will I owe in capital gains tax if I sell my cottage?”
With the sale of any property, you are required to report it to the CRA and pay the applicable capital gains tax. This includes the sale of your beloved family cottage. The CRA does offer an exemption on this appreciation tax to principal residences, which could possibly apply to your cottage. Let me explain.
 
If you enjoy your cottage as your vacation home and it IS NOT  your principal residence then you would be required to pay the applicable capital gains tax at time of sale. How much exactly? The amount that you will owe depends on the appreciated value from the time you purchased the cottage 
 
For example,  if you purchased the cottage for $200,000 ten years ago and now plan to sell the cottage for $500,000 due to appreciation and improvements you’ve made over the years you would owe capital gains tax on $300,000 (the difference between sell price and purchase price).
 
On the other hand, if your cottage IS your primary residence then you may be exempt from paying any capital gains tax.
Although the sale of a principal residence still needs to be reported to the CRA it is exempt from being taxed on capital gains.
In some scenarios, your cottage may start off as your vacation home but become your primary residence after some time.  If this is the case, the tax owed on capital gains is based on the appreciation before it became your principal residence. 
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For example, you purchased the cottage for $200,000 ten years ago but moved in to the cottage as your primary residence after five years of ownership. At that point the cottage had appreciated in value to $250,000.  In the five years since you’d been living there, you completed improvements increasing its value further and intend to sell it now, another five years later, for $500,000.
 
In this scenario you would only owe capital gains tax on $50,000 (the value of the property at the time it became your principal residence less the original purchase price). You would be exempt from paying the capital gains tax on the additional $250,000 in appreciated value over the five years that the cottage was your principal residence.
 
Contrary to popular belief, capital gains are not taxed at your marginal tax rate. Only half (50%) of the capital gain on any given sale is taxed all at your marginal tax rate (which varies by province). On a capital gain of our example of $50,000 for instance, only half of that, or $25,000, would be taxable. For a Canadian in a 33% tax bracket for example, a $25,000 taxable capital gain would result in $8,250 taxes owing. The remaining $41,750 is the investors’ to keep.
 
If you’re thinking of selling your cottage we can help make sure you are asking the right questions and getting the answers that you need. You can reach out to us at 519.586.7922.

9 thoughts on “How Much Will I Owe in Capital Gains Tax if I Sell My Cottage?

  1. Who can I contact to find out if the tax on capital gains from a cottage sale is different if the cottage was on leased land. Can lease payments or expenses related to cottage up grading be used to offset some of the capital gains effect?

    1. That is a great question, Neil. Your best to contact your lawyer and accountant to determine what expenses can be used to offset the gain. They will have more answers for you.

  2. My sister and I split the funds on the family cottage, Will i pay capital gains on half of the half . I am also at the lowest tax bracket.

    1. Hi Maureen. That is a great question! Typically, the answer would be yes. You would pay capital gain taxes on your portion of the taxable gain. So increase in value from the time you took ownership. However, all scenarios are different. Will depend on the increase in value, expenses you can claim etc. You are best to speak with your accountant and/or lawyer to get the exact answer and amount of taxes applicable.

  3. This is all helpful but what do I consider my the starting point for the capital gains calculation? I bought the land and build a small cottage 50 years ago all for about $7,000. Did the change in capital exemption rules in 1994 make the value at that time my starting value for calculating capital gains, or was it even earlier? If i have to go back 50 years, I guess I will need to track all expenses, like a well etc? I have much of that for the last 30 years, but 50. Thank you.

  4. question. Hoping someone can help me. My wife and I bought a lot in 2014 to build a cottage on which later will be our primary residence. We have just now completed building this modest home. The question is would should we get the home appraised now so we have evidence of what this property is now worth to avoid over paying capital gains later?

    1. Yes absolutely! There are times when we are asked to value properties going back 10 years or more. It’s very hard to do. Having that now will save you doing that when you do go to sell.

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