Cottage and Taxes: Owning & Renting a Recreational Property

Capital gains on recreational properties

When you sell or transfer ownership of a secondary property, such as a cottage or cabin, any profit realized is treated as a capital gain for tax purposes. This gain is generally taxed in the year the property is sold or deemed to be disposed of.

In Canada, only a portion of the capital gain is included in taxable income, and this amount is taxed at the owner’s marginal tax rate.

For example, if you buy a cottage for $400,000 and sell it a few years later for $500,000, your capital gain is $100,000. Half of that, $50,000, is taxable.

For most individuals, the standard inclusion rate is 50%; however, higher inclusion rates may apply to gains above certain thresholds under current tax rules.

You can reduce the taxable capital gain by deducting eligible expenses incurred to sell the property, such as real estate commissions, legal fees, and certain improvements that increase the property’s cost base.

“Considering that many vacation properties can be held for decades before changing owners, the tax implications can be more significant than many people expect,” Sanderson says. “That’s why it’s so important to plan for that tax hit, especially if you intend to include the property or the proceeds in your estate plan.”

What is the principal residence exemption?

The Canada Revenue Agency (CRA) treats primary residences differently from secondary residences. As a taxpayer, it’s important to understand the distinction.

In Canada, you don’t pay capital gains tax when selling your primary or principal residence because of the principal residence exemption. But as the name implies, that exemption only applies to one property at a time.

A recreational property—such as a cottage—can be designated as your principal residence. However, this means your other property would not qualify for the exemption during those same years, which may have an unintended tax implication.

What is an adjusted cost base?

The adjusted cost base (ACB) is the total cost for tax purposes of acquiring and improving a property. It is used to calculate capital gains or losses when a property is sold.

Simply put, the ACB starts with the original purchase price of the property and is then adjusted over time to include certain eligible expenses that increase the property’s value or usefulness.

The higher the ACB, the lower the taxable capital gain when the property is eventually sold.

Eligible expenses added to the ACB include major capital improvements and certain acquisition costs (such as commissions and legal fees). These can include renovations such as a deck, a roof replacement, or finishing the basement, as well as legal fees and land transfer tax.

Routine maintenance like painting and minor repairs are excluded. Just make sure you document all of the improvements and expenses and keep receipts.

Tax implications of renting out your recreational property

It’s not uncommon for Canadians to rent out their cottage or cabin to help cover costs or earn extra income. But doing so has financial and tax considerations. Here are some of them:

1. Rental income reporting: If you decide to rent out your property, any income you earn must be reported at tax time using the T776 form, also known as the Statement of Real Estate Rentals. When your expenses exceed income on your property, you may also be able to claim rental losses. Learn more about claiming a loss on rental property. There is a separate process for foreign residents reporting rental income earned on properties in Canada.
2. Deductible expenses: You can deduct certain expenses that you pay, like utilities, mortgage interest, and property taxes, if your recreational home is generating income. (Learn more about small-business tax deductions.)
3. Change-in-use implications: At some point, you might change the use of your recreational property, like converting it from a primary residence to a rental or vice versa. Doing so triggers a “deemed disposition” for tax purposes. You are legally considered to have sold and immediately repurchased the property at fair market value (FMV), which can trigger immediate capital gains tax.

What is Capital Cost Allowance (CCA)?

Everyone remembers all the fun of a vacation property, but owners will also remember paying for upkeep and repairs. Capital Cost Allowance (CCA) is a tax deduction that takes a bit of the sting out of those expenses, allowing you to recover the cost of a depreciable property over time rather than deducting its full purchase price in the year it is acquired.

Depreciable assets are organized into specific property classes, each with its own deduction rate, and CCA claims must be calculated based on those rates.

A building falls into class 1, 3, or 6, depending on when it was built and when you acquired it. The class also includes parts used in the building, such as plumbing, electrical wiring, heating and cooling equipment, lighting fixtures, and sprinkler systems.

While CCA can provide tax relief in the short term, it can also complicate future tax outcomes.

CCA claimed on a tax return is a tax deferral, not a permanent write-off. So, any deductions will need to be “recaptured” when the property is sold, potentially increasing taxable income in the year of sale.

Also, claiming CCA means you cannot use the principal residence exemption.

Taxes and short-term rental platforms

Before you decide to list your property on a platform such as Airbnb or Vrbo, it’s important to check your municipality’s laws around short-term rentals.

Many jurisdictions require you to meet certain requirements, register the property, and pay a licensing fee. You may also have to collect municipal tax.

When you file your tax return, you can deduct reasonable current expenses (explained below) that you incur while running your business—but only if your short-term rental is compliant.

A property is considered non-compliant if it operates in an area where short-term rentals are prohibited or does not have the required local licences, registrations, or permits.

Under recent rule changes, you can’t deduct expenses related to non-compliant short-term rentals after 2023.

Capital improvements

Major renovations, such as building an addition, replacing a roof, or upgrading a kitchen, are typically treated as capital expenditures and are added to the property’s adjusted cost base. That lowers your taxable capital gain when you sell or transfer the property.

The difference between current and capital expenses

Renovations and expenses that extend the useful life of your property or improve it beyond its original condition are usually considered capital expenses, while regular maintenance, such as painting the exterior of a wooden house, is considered a current expense.

If you’re unsure whether you have a current or capital expense, read more here.

Eco upgrades and rebates

Many rebates and government incentives related to renovations apply to properties that are “ordinarily inhabited,” as the CRA puts it.

Your property may be eligible for programs like the multigenerational home renovation tax credit (MHRTC), home accessibility tax credit (HATC), or the Oil to Heat Pump Affordability program if it’s your primary residence.

However, changing the designation of a recreational property to a principal residence can have tax implications—particularly in relation to capital gains when the other property is sold—so don’t do it simply to access these benefits.

Some incentives, like Ontario’s Home Renovation Savings Program, apply to recreational properties. This program offers rebates of up to 30% for home energy efficiency renovations and improvements, including new windows, doors, insulation, air sealing, smart thermostats, and heat pumps, as well as rooftop solar panels and battery storage systems. Energy-efficient appliances, including refrigerators and freezers, also qualify.

Estate and inheritance considerations

With all the memories built over the years, owners often want a recreational property to stay in the family. But if you want future generations to enjoy the space, it’s important to plan for the tax implications in advance.

Gifting or transferring ownership will not eliminate a potential tax liability. Whenever a property title changes hands—whether through a sale, upon the owner’s death, or as a gift—the event is treated tax-wise as a sale at fair market value.

As a result, any increase in value is taxed as a capital gain. The only exception to this rule is when the property is transferred to a spouse or common-law partner, in which case the gain is deferred until the surviving spouse sells or transfers the property, or passes away.

When someone dies, many provinces and territories charge probate fees based on the value of assets passing through the estate. One strategy to reduce these fees is to place property in a living trust, which allows the asset to pass directly to beneficiaries without forming part of the estate.

“Putting the property into a trust can be part of a tax-efficient strategy to pass it down to the next generation,” says Sanderson. “But this approach doesn’t eliminate tax considerations.”

Transferring the property into a trust is generally treated as a disposition at fair market value, which may trigger capital gains tax at the time of transfer.

In addition, trusts are subject to their own tax rules (such as the 21-year deemed disposition rule for reporting unrealized capital gains), and they may face higher tax rates.

As a result, while a living trust can reduce probate fees, it may introduce other tax costs and administrative complexities that should be carefully evaluated.

Strategies such as life insurance or transferring ownership during your lifetime may also help manage or offset potential tax burdens to your heirs. A financial planner can help you consider your options.

Finance and ownership tips

From maintenance to taxes, there are many facets of managing a recreational property. Here are some tips to help you stay on top of everything:

• Shared ownership: Owning a property with someone else can be a practical way to make it more affordable. Having clear agreements among owners about usage, expense sharing, and decision-making can help to prevent conflict down the road.
• Ongoing costs: Budget not only for mortgage payments and property taxes but also for ongoing expenses like maintenance, utilities, insurance, and unexpected repairs, so the property remains financially sustainable over time.
• Organized records: Filing away receipts, maintenance logs, and ownership agreements can help ensure smoother cost tracking. This information will be essential when calculating capital gains in the future.

The bottom line

Recreational properties are often seen as places for family gatherings, relaxation, and creating lasting memories—but they also carry significant long-term financial and tax implications that shouldn’t be overlooked.

Beyond their personal value, recreational properties require thoughtful planning around ownership, maintenance, and eventual transfer to new owners to ensure they remain a benefit rather than a burden.

“Start talking to your kids early on about taking over or inheriting the cottage, so they have time to learn what’s involved,” says Sanderson.

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