For those with the means to do so, investing in a second property – a cabin, cottage, chalet or camp, depending on where in Canada you live – has become increasingly popular during the COVID-19 pandemic. While most are aware that owning a rural property will present numerous obstacles not present in city life, such as managing wells, septic systems, etc. They must also become well versed in the tax implications of cabin living, or pay for costly mistakes in the future.
Capital Gains Considerations
One significant tax consideration when buying a second property is the capital gain that will arise on sale, transfer, or change in use of the property. This is essentially a tax on half of the increase in value of the property since the property came into your hands.
The principal residence exemption makes the capital gain on one property non-taxable. However, the situation changes when you buy a second property, since a family unit can use their principal residence exemption for only one home. If you own more than one property, you should consider on which property you will use your principal residence exemption. It is generally a good idea to apply this exemption to the property that has increased in value most since purchase.
In order to make the most informed decision and to ensure your tax payable is minimized on the day your capital gains become due, it is important to understand some aspects of how the capital gain is calculated. Most importantly, any amount paid for capital improvements for the property will reduce the capital gains tax due on disposition. Capital improvements include most renovations and improvements to the property other than general maintenance. In order to benefit from this tax reduction, it’s important to keep receipts and records of any renovations or purchases you make during the property’s lifetime.
Thinking of Renting Out the Cabin?
Using the property as a rental will give rise to several other tax considerations. Any rental income will be taxable, however certain expenses related to cabin upkeep, advertising, etc., can be deducted from your income. The change from personal use property to rental can trigger a capital gain, and specific planning will be necessary to avoid or delay that tax hit.
While the increased rental income can be very attractive, understanding all the tax considerations of this change is key to fully understanding the economic implications of deciding whether to rent your property.
Questions? We’re here to help.
As any cabin owner new or old can attest, cabin life is full of fun, sun, and unexpected challenges. While we can’t help with sunburns or bug bites, our tax team at Boughton Law can help ensure you are well prepared to avoid any tax issues that might arise through cabin living. Don’t let being poorly prepared for tax payday take the joy out of owning your own piece of the Canadian wilderness.