Canadian tax laws require owners to pay capital gains upon disposition (selling) of assets sold at a profit.
Secondary properties (such as cottages and waterfront properties) cannot be sheltered using the principal place of residence exemption.
Capital gain may be triggered regardless of how the properties were obtained (inheritance, gift, or common purchase) and later sold.
What Classifies as Secondary Property
Generally, a principal place of residence is when the property was your principal residence for every year you owned it. This is important because capital gains on a principal place of residence are not currently taxed.
Generally, CRA may allow the following as principal places of residence:
- a house
- a cottage
- a condominium
- an apartment in an apartment building
- an apartment in a duplex or
- a trailer, mobile home, or houseboat
How Are the Calculations Made?
The gross gain is equal to the proceeds less selling costs and the adjusted cost base (ACB).
After the mid-1990's, CRA calculates capital gains taxes not at your marginal tax rate but rather at only HALF (50%) of your marginal tax rate
The capital gain is calculated by subtracting the adjusted cost base of the property from ???sale price???. The adjusted cost base of the property can include capital improvements.
...using the fair market value of the property less the cost base of the property.
...the amount of capital gains you will need to pay depends on a variety of factors, but generally, the two main factors are:
- income tax bracket
- how much of other income sources you have
Generally, 50% of the gains on the sale of your rental property will need to be included in your tax return as taxable income
Tip: Include All Eligible Costs
CRA will often look for proof of the expense and determine why it is not a regular repair or maintenance cost.
Eligible expenses may include:
- Land transfer taxes on acquisition
- Utility connection costs
- Real estate commissions
- Real estate inspections
- Legal fees
- Cost of a survey or title insurance
- Other purchase agreement disbursements, other than reimbursements to the former owner for annual costs such as property taxes and utilities that were paid before closing
- Repairs and maintenance related to properties acquired in a state of disrepair. Generally speaking, it may be possible to include costs that wouldn’t ordinarily qualify in the opening ACB such as costs related to replacing a roof, buying new fixtures and plumbing, replacing flooring, etc. The key is that the state of disrepair was factored into the purchase price (i.e. the price would have been higher if the cottage was in better shape and these costs were incurred for that reason).
...TODO: does this include property taxes paid over the years????...
NOTE: your time and labour does not qualify as eligible expense - only the cost of materials.
Tip: Income Timing
For those with flexibility, choose a year where you have less income, thereby lowering the marginal tax rate and taxes owed.
Tip: Spousal Split
????...move to lower income spouse...???
Are the property taxes I paid over the years tax deductible?
Are Real Estate fees tax deductible?
Yes, generally, the real estate fees and commissions of disposing of your secondary property (such as cottage or waterfront) are included as an expense and therefore tax deductible.
Why is it different from selling my home?
Your home is your principal place of residence - any gains upon selling your home are capital gains tax free. However not so for a secondary property (such as a waterfront property or cottage). If you sell that secondary property for more than you paid, this triggers a taxable capital gain with the Canada Revenue Agency (CRA).
What if I sell for LESS than I paid for it?
CRA states that you cannot claim a loss on a secondary property or waterfront cottage: Although you have to report any gain on the sale of personal-use property, generally you are not allowed to claim a loss.
Calculating Capital Gains Taxes of Inheriting a Waterfront Property or Cottage
When someone passes away, they are deemed to dispose of their capital property at the fair market value (FMV) on the date of their death. The person inheriting the property assumes the deceased's FMV on their death, as their ACB.
If inherited or received as a gift, evidence of the value at the time of the gift or inheritance such as a valuation.
Use the fair market value (FMV) at the time you inherited a waterfront property or cottage to calculate the capital gains. Inheriting means other than your spouse.
Calculating Capital Gains Taxes of Selling a Foreign Secondary Property
This calculator is a 1-step calculator that will provide you with a pretty good estimate of the amount of taxes you may need to pay upon disposal of your waterfront cottage property:
The original purchase price plus all related and eligible expenses (such as improvements made to the property).
Estimate of the value of the property.
A marginal tax rate indicates that taxes vary by the level of income. In Canada, the marginal tax rate varies by province.
Tax owed to the government (e.g. CRA).