Cottages can be a great investment, but not a second ‘primary residence’ – Metro US

Cottages can be a great investment, but not a second ‘primary residence’

Q: Q I purchased my first home in 1993. In 1999, I inherited a cottage two hours north of Toronto. Should I decide to sell my cottage, will it be subject to income tax and can my wife or I claim it as our principal residence?

Harry, toronto

A: Homeownership continues to be one of the best investments sheltered from tax. What other investment can you live in, decorate, renovate, landscape, entertain, sell and be exempt from sharing the profits with Mr. Harper? Gains on the sale of a home that is used by an individual as their principal residence is exempt from tax. The sale does not have to be reported in your annual tax filings.

However, ownership of another property beside your primary residence will be subject to taxation on the appreciated value. Although a cottage has many of the enjoyable qualities of your primary residence, a family unit has been able to own only one principal residence since 1982.

Individuals are taxed on capital gains on the sale of a property that is not their principal residence. Capital gains are calculated by subtracting the cost of the property from the proceeds from the sale; 50 per cent of the capital gain must be added to income and taxed at a taxpayer’s rate in the year of the disposition.

Income tax to CRA is deferred and will only occur if and when the taxpayer sells the cottage or both spouses pass away. Families can continue to enjoy their cottage for years without having to pay income taxes.

That said, there will come a point where you may have to pay the tax. An important aspect of tax planning is to keep as much in your pocket by minimizing and the deferral of income tax for as long as possible. Most cottage owners either purchase or inherit a cottage and do not consider it as an investment. Its primary purpose is for their and future generations’ enjoyment.

Ask any Realtor in cottage country — cottages are phenomenal investments. Purchasers/inheritors of cottages should proceed and consider cottages as they would any other investment. Be proactive and see your accountant or tax professional for tax-planning advice.

Henry Choo Chong, CGA provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304. Any questions to Money Matters should be E-mailed to choochonghcga@yahoo.ca.

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