Tips & Advice

What Renting Out Your Cottage Means at Tax Time

Thinking about how to turn your cottage into an income property.

Renting your cottage is an attractive option for a number of reasons. Perhaps the family’s busy schedules mean the cottage isn’t being enjoyed as much as it used to be and has stood empty for much of the summer. Maybe the distance from your home makes your cottage at risk for vandalism and you’d feel better if it were occupied more often. Or maybe your neighbour’s boasting of his $2000/week profits from his rental makes you consider turning your family cottage into a moneymaker. Regardless of the reason, there are facts to consider before renting your summer home.

Change in Use

Unless they are used to generate income, cottages are considered to be personal use property and are taxed as such for capital gains. Once the cottage begins its role as a rental, it is said to have a “change in use”.

The property is no longer being used solely as personal property and enters a new category as an income property.  When this happens, a “deemed disposition” of the property occurs. A deemed disposition means that capital gains may be owing immediately as if the property had been sold.

Rental Income

Net rental income is taxed just like other types of income. While it is true that you can deduct expenses from the gross rental income, keep in mind that these expenses must be proportioned to the time the property is being used as a rental. For example, if you rent out the cottage for 2 months per year, only 1/6 of the annual property taxes are deductible. If you are a senior and receive OAS, your rental income may push your total income over the OAS income cap. If this happens, you will have to repay a portion of your OAS benefits.

Insurance

Homeowner’s insurance policies generally do not cover rentals. A new policy may have to be issued to cover any potential liability, most likely at a higher cost. An inspection of the cottage may also be necessary to complete the new policy.

Maintenance

If the air conditioner goes out on a weekend, there’s a good chance you would live with the heat and wait until Monday to call a repairman. If you are renting your cottage, tenants expect these issues to be fixed immediately as they are paying hundreds of dollars to enjoy the property. If you don’t live close to your rental, any small maintenance issue may end up costing a bundle since you cannot assess the situation yourself. However, like other expenses, maintenance for the period during which the property is rented can be deductible.

Not Primary Residence

Another thing to consider is what the CRA might do to your cottage property if you owe money to them and cannot pay.  Since a cottage is not a principal residence, the CRA could register a lien against the property and force the sale of it, or they could intercept the rent payments that your tenants are making to you.

 

While renting out your cottage can change your tax situation, TurboTax Premier walks you through those changes so you can get back to lounging dock-side instead of worrying about your taxes.

About Jennifer Gorman:

Jennifer is a tax expert with the TurboTax’s customer support team. With more than 20 years of tax preparation experience, she enjoys holding yearly seminars in her hometown in Newfoundland to teach seniors and students how to use TurboTax to prepare their own returns.