For many Canadians, owning a vacation property—whether it’s a cozy lakeside cottage or a chalet in the mountains—is a dream come true. But beyond the lifestyle perks, vacation homes come with important tax considerations that can significantly impact your bottom line.
Whether you already own a vacation property or are considering buying one, understanding the tax implications can help you avoid costly surprises. Here’s what every vacation property owner should know:
1. Principal Residence vs. Secondary Property
In Canada, only one property per family unit per year can be designated as a principal residence, which qualifies for the Principal Residence Exemption (PRE) when sold. Most people use this exemption for their main home in the city. However, if your vacation property appreciates significantly, there may be a planning opportunity to designate it as your principal residence for some or all of the years you’ve owned it.
Key Consideration:
If you sell your cottage or vacation home, any gain not covered by the PRE will be subject to capital gains tax on 50% of the appreciation.
2. Capital Gains Tax on Sale
When a vacation property is sold, capital gains tax applies to any increase in value from the original purchase price (plus eligible capital improvements). This can result in a significant tax bill, particularly for properties that have appreciated over many years.
Pro tip: Keep detailed records of:
- Purchase price
- Major capital improvements (e.g., adding a deck, dock, or septic system)
- Expenses related to buying and selling
These can increase your adjusted cost base (ACB) and reduce taxable gains.
3. Gifting or Inheriting a Cottage
Transferring a vacation property to family—either during your lifetime or as part of your estate—also triggers capital gains tax based on fair market value at the time of transfer, unless it's passed to a spouse.
4. Rental Income from the Vacation Property (Including Short-Term)
If you rent out your vacation property—whether for a few weekends or the entire summer—it becomes income-producing property, and you must report the rental income on your personal tax return.
You can deduct reasonable expenses against this income, such as:
- Mortgage interest
- Utilities
- Repairs and maintenance
- Property taxes
- Insurance
- Advertising
- Management fees
- Depreciation (CCA), with caution
Important: Depreciation claims (Capital Cost Allowance) may reduce your current tax burden, but they can also increase your taxable gain when the property is sold.
Short-Term Rentals (Airbnb/VRBO) in Alberta
Alberta does not have a provincial sales tax (PST), but short-term rentals (less than 28 days) in the province are subject to the 4% Alberta Tourism Levy, which applies even to rentals through platforms like Airbnb and VRBO.
If you are an Alberta-based property owner renting your vacation property short-term, here’s what you need to know:
- Tourism Levy Registration: If you rent the property yourself (not through Airbnb or VRBO), you are responsible for registering, collecting, and remitting the levy.
- Platform Responsibility: If you rent through Airbnb or VRBO, these platforms generally collect and remit the tourism levy on your behalf—but you are still responsible for understanding your reporting obligations.
- Business Income or Rental Income? Frequent short-term rentals may cause the CRA to classify your activities as a business, especially if you're providing services (like daily cleaning or meals). This can trigger GST/HST registration and different tax treatment.
- Change-in-Use Rules: Regular short-term rental use may result in a change-in-use, which could trigger a deemed disposition—forcing you to report capital gains even if you haven’t sold the property.
CRA is tightening enforcement on short-term rental income, especially where owners are not reporting income or are unaware of GST/HST or deemed disposition rules.
5. GST/HST Considerations
Most personal-use vacation properties are not subject to GST/HST. However, if you’re building a new vacation property or significantly renovating an existing one, GST/HST may apply. And if the property is primarily used for short-term rentals, you could be considered a small business and have to register for GST/HST.
6. Property Taxes and Municipal Levies
Many vacation properties fall in areas with higher-than-average property tax rates, or are subject to special levies (e.g., waterfront protection, septic inspection fees). These can vary widely by municipality and are important to include in your annual cost projections.
Final Thoughts
Owning a vacation property is a wonderful lifestyle choice, but it’s also a significant financial decision. A thoughtful tax plan—especially one that considers long-term ownership, use, and eventual sale—can reduce your tax burden and avoid costly mistakes.
Our Advice:
Before purchasing, gifting, or selling a vacation property, speak to a CPA or tax advisor. We can help you:
- Understand the best use of the principal residence exemption
- Structure ownership to minimize tax
- Plan for future transfers to family members
- Report rental income and expenses correctly
Questions about your cottage or cabin?
Contact our team—we’d be happy to help you plan for your lifestyle and legacy.
This blog was written using the assistance of ChatGPT.
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