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.
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.