Cottage Capital Gains
How the gain on a cottage is calculated, using the principal residence exemption, the 1994 election and passing it on.
The short version
- A cottage is capital property. When you sell it, give it away or die owning it, the gain is a capital gain, and half of it is taxable, unless the principal residence exemption covers some or all of it.
- Your family can designate one property per year as its principal residence. If the house in the city got those years, the cottage's gain for them is taxable.
- Giving the cottage to your children, or selling it to them for less than it's worth, is treated as a sale at fair market value. Selling below value can even create double tax.
- At death, the cottage is deemed sold at market value on the final return, unless it passes to a spouse or common-law partner (or a spousal trust), which defers the gain.
- Your cost includes the purchase price, closing costs and capital improvements, plus any amount added by a 1994 capital gains election. Old records can be worth tens of thousands of dollars.
Cottage Capital Gains
The family cottage is where sentiment and tax collide. Everyone wants it to stay in the family; nobody wants to talk about the six-figure tax bill that usually comes with passing it on. The bill doesn't go away by not talking about it. It lands on someone's final return, often with no cash to pay it except selling the cottage. Here's how the gain is calculated and the main ways families handle it.
Calculating the Gain
| Example: cottage bought in 1998 | Amount |
|---|---|
| Sale price (or market value at gift or death) | $750,000 |
| Less selling costs (commission, legal) | ($37,500) |
| Less purchase price and closing costs | ($150,000) |
| Less capital improvements (new roof, addition, septic, dock) | ($60,000) |
| Capital gain | $502,500 |
| Taxable half | $251,250 |
| Tax for an Ontario owner with $90,000 of other income | about $119,000 |
Every documented improvement reduces that bill by roughly a quarter of its cost for a high-income owner. Repairs and maintenance don't count. Run your numbers on the capital gains tax calculator; the rules for the calculation are on capital gains tax in Canada.
Using the Principal Residence Exemption on the Cottage
A cottage that your family ordinarily inhabits, even only in summer, can be designated as your principal residence. The catch is that you get one designation per family per year. If you owned a city home over the same years, you choose which property gets each year. Usually the years go to the property with the bigger gain per year owned; sometimes that's the cottage. The full method, with a worked home-and-cottage example, is on the principal residence exemption.
A key timing point: if you sell the city home first and designate every year to it, those years are gone for the cottage. Run the numbers for both properties before the first sale.
Selling or passing on the cottage?
Enter both properties' purchase years, costs and values. The SmartFile splits the principal residence years for the biggest saving, estimates the tax on the cottage, and fills in form T2091(IND) and Schedule 3.
The 1994 Election: Check Your Old Returns
Until February 22, 1994, individuals had a $100,000 lifetime capital gains exemption for most property, including cottages. Many owners filed an election (form T664) on their 1994 return to lock in the gain to that date, which raised the cottage's cost for tax purposes. If your parents owned the cottage then, look for that form in their 1994 papers, or ask CRA. It can reduce today's gain substantially, and nobody will apply it unless you find it.
Passing the Cottage to the Next Generation
| Option | Tax effect | Watch out for |
|---|---|---|
| Hold until death | Deemed sale at market value on the final return; deferred if left to a spouse | The estate must pay the tax before distributing; may force a sale |
| Gift it now | Deemed sale at market value now; children's cost is market value | Tax now, with no cash from the gift |
| Sell to the children below market value | You're taxed as if sold at market value; the children's cost is only what they paid | Double tax on the same gain later. Generally avoid |
| Sell to the children at market value, paid over time | Capital gain, but a reserve can spread it over up to 5 years | A real sale with real payments; needs documents |
| Add the children to title | A deemed sale of the share transferred, unless they hold it in trust for you (then usually no change) | Creditors, divorce, and bare trust reporting |
| Transfer to a trust | Usually a deemed sale, except some trusts for owners 65 and older | The 21-year deemed disposition rule; legal costs |
| Life insurance | No change to the tax; provides cash to pay it | Cost of premiums, health qualification |
Inheriting rules from the heir's side are on inheriting a house in Canada, and co-owning with family on buying property with family.
Other Cottage Questions
- Renting the cottage out some weeks? Report the rent on form T776, deduct a share of costs, and don't claim CCA if you want to keep the exemption option. Short-term rental licensing rules apply in many cottage townships; see Airbnb taxes.
- Reporting: a cottage sale goes on Schedule 3; if you designate any years, add form T2091(IND). See how to report a principal residence sale.
- Non-resident owners need a clearance certificate when selling.
What happens to the cottage gain when the owner dies, and how it compares with probate fees, is on probate fees vs income tax and estate taxes in Canada.
Cottage Capital Gains Questions
Do I pay capital gains tax when I sell my cottage?
Usually on at least part of the gain. Half of the capital gain is taxable, unless the cottage is designated as your principal residence for some or all of the years you owned it.
Can my cottage be my principal residence?
Yes, if your family ordinarily inhabited it in the year, even only seasonally. But your family can designate only one property per year, so years used for the cottage cannot also be used for your home.
What happens if I give my cottage to my children?
You are treated as selling it at fair market value, and you report the capital gain. Your children’s cost becomes the fair market value.
What happens to a cottage when the owner dies?
It is deemed sold at fair market value on the final return, and the tax is paid by the estate, unless it passes to a surviving spouse or common-law partner, which defers the gain.
What is the 1994 capital gains election?
An election, filed on form T664 with the 1994 return, that used the former $100,000 capital gains exemption to increase the cost of property such as a cottage. If one was filed, it reduces the gain today.
Sources: CRA, Guide T4037 Capital Gains; Income Tax Folio S1-F3-C2, Principal Residence; Capital gains on a deceased person's return. Checked October 2026. The tax estimate is from our 2026 Ontario rules engine. Succession options are summarized and each has legal as well as tax consequences.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.