A summer cottage can be a wonderful place to cool off and recharge when the thermometer climbs.
Thinking you might like to rent out your vacation property when you’re not using it? Tax-wise, you might want to think twice.
The advantage of renting out your summer home is that you can write off a portion of your expenses of the cost of owning that property against the income you get for rental of that property. But on the other hand, you could end up paying more income tax because of incurring a capital gain.
You see, if your cottage is used primarily for your own personal use or that of people related to you, your second home is considered personal-use property and you would only incur a capital gain for the property when you sold or disposed of the property.
But if you rent out your summer place, you’re changing the use of your property from personal use to using the property to produce income. And that means that there is a deemed disposition; it’s just as if you had sold the property and you will incur a capital gain (money you received by selling your cottage for more than you paid for it) or loss. This section of T4037 Capital Gains 2011 explains the rules for calculating a capital gain or loss on personal-use property (Canada Revenue Agency).
Unfortunately, if you end up with a capital loss, you can’t deduct it as losses on personal-use property are not deductible.
But if you have a capital gain, you may be able to benefit from the principal residence exemption,which would cut down on the amount of tax payable. The principal residence exemption eliminates the capital gain when a property is sold if it’s been the seller’s principal residence for the entire time it’s been owned.
That’s not a very likely scenario with your summer home, I know. But consider this: the capital gain could still be partially eliminated by the principal residence exemption if the property has been the principal residence for only a portion of the time it has been owned. And there’s no deemed disposition if you move in to the cottage yourself. So making your summer cottage your retirement home could be a wise tax move.
For more information, see these Canada Revenue Agency resources: