Tax Tips for Recreational Property Owners

Fall 2012

One of the most common and biggest tax
savings measures available to Canadians is the principal residence exemption from
capital gains tax.  Ordinarily, if you
sell a property for more than you paid to buy it, you have a capital gain and
you are required to pay tax on that capital gain. However, if the property is
your primary residence, you can claim the principal residence exemption and
avoid paying that tax. If you have a recreational property (such as a cottage,
cabin, or condo) where you live part of the year, you can claim the principal
residence exemption on that property. You may even be able to claim the principal
residence exemption on a property outside of Canada. However, there’s a catch
— you can only claim the exemption on one residence at a time. For example,
let’s say you bought your house and also inherited a cottage in 1999.  In 2011 you decide to move houses, but you
plan to keep the cottage.  Let’s say the
house appreciated in value by $50,000 in that time and the cottage has
appreciated in value by $225,000.  For
the years 1999 to 2011, you can claim the principal residence exemption on only
one of the properties.  Although you do
not plan to sell the cottage anytime soon, it may be wiser to pay the small
amount of tax on the capital gain on your house (you will have to pay tax on an
extra $25,000 of income) and preserve the ability to claim the much larger
exemption for those years on the cottage at a later time when you decide to
sell.  You should seek specific advice at
the time to determine which is the better option.

If you do not want to claim the exemption
on your house when you sell it because you want to save it for later, you need
to file Form T2091-(IND), “Designation of a Property as a Principal Residence
by an Individual.” If you fail to file this form, the CRA will assume that you
are using your exemption to eliminate the gain, and, therefore, you will not be
able to use it for another property for those years. 

You can also minimize the amount of tax you
pay by keeping good records of the capital costs that you put into both
properties. Any capital expenditures that you make will reduce the amount of
any future capital gain. A capital gain is commonly explained as the difference
between the sale price you receive and the amount you paid to buy the
property.  But technically the gain is
the difference between your “proceeds of disposition” (usually your sale
proceeds) and your “adjusted cost base” (your purchase cost plus capital
costs).  In order for a cost to be a
capital cost, it has to be for a lasting improvement to the property. If the
expense represents something that is used up in the year or is replacing
something that was used up, it will not qualify as a capital cost.  For example, gas and power are used up;
therefore, utility bills are not considered to be capital costs.  Similarly, renovations to replace worn items
(such as wall to wall carpet) are not capital expenses.  However, a lasting improvement over and above
the property’s original condition is a capital expense.  Using the previous example, adding a new
carpet to a floor that had never had carpet would be a capital cost.  The property’s original condition is its
condition when you purchased the property. 
In other words, if the roof was in terrible shape when you bought the
property, the cost of a new roof would be capital, while replacing the roof 15
years after you bought the property with similar roofing material would not be

Keeping track of capital expenses can make
a big difference when it comes to determining whether you should claim the
exemption on your house or your second property.  These receipts must be kept for at least
three years after you have sold the property.


This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice.

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