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Personal finance

Thinking of selling your cottage?

May 29, 2023

Vacation homes are in high demand these days. Here’s what you need to know if you’re thinking of selling yours.

According to Angela Iermieri, a financial planner with Desjardins, there are several factors to keep in mind. 

Principal or secondary residence: what’s the difference?

Before diving into this topic, it’s important to mention that your principal residence generally is the house you live in and the secondary residence, the cottage.

From a tax perspective, a principal residence can take several forms: it can be a house, a cottage, a condo, or a unit in a rental building you live in (e.g., a duplex). This status can be assigned to a residence that you own or co-own, which is usualy inhabited at some point during the year by you, your spouse, your child or even your former spouse. Even if you only live there for a few weeks during the year, it can be designated as your principal residence, which could benefit you during the sale.

If you own more than one property, the important thing to remember is that when you file your income tax return for the year that you sell a residence, you have the option of designating an eligible property you’ve sold as your principal residence.

How to make the right choice?

When you’re considering selling a property, it is important to analyze your options. Angela Iermieri recommends asking a professional such as a tax specialist, appraiser or financial planner to help you get a clearer view of your options. They’ll be able to advise you on the best residence designation by determining whether the value of the properties has increased, among other things.

Has the value of your cottage increased more than your home in recent years? If so, you would probably benefit from designating your cottage as your principal residence. That’s because when you sell a property that is designated as your principal residence for a year or more, the capital gain could be partially or completely exempt from tax depending on the choices you made.

You should also be aware that a couple can designate only one principal residence for each year they owned it*. This means that a husband and wife cannot designate different principal residences for the same tax year, for example with one of them claiming a principal residence in the city and the other claiming a cottage as their principal residence.

You should know that Canadian taxpayers are required to report the sale of their principal residence on their tax returns, in order to make a designation.

What could be the tax consequences of selling your cottage?

If your cottage is not designated as your principal residence, you’ll have to pay tax when you sell it. If you transfer or sell your property to someone other than your spouse, 50% of the capital gains realized will be added to your income, and will therefore be taxable.

An example

14 years ago, Pamela, 61, paid $100,000 for a cottage. She spent $20,000 on major renovations, keeping the invoices. Over the years, the property increased in value.

Pamela decided to sell her cottage for $250,000.

The capital gains can be calculated as follows:

$250,000 sale price - purchase price including renovations ($120,000) = $130,000

This calculation shows that Pamela has realized capital gains of $130,000. Of this amount, she declares 50% as taxable capital gains, the other 50% being tax exempt. When she files her income tax return, Pamela will include the $65,000 capital gains as income, which will be taxable at her personal tax rate.

So what does this really mean? “Capital gains are the difference between the sale price and the purchase price (including notary’s fees and the cost of improvements you’ve made over time) minus certain expenses (e.g., commissions paid to a real estate agent at the time of the sale),” explains Angela Iermieri. This means that you’ll have to pay taxes on 50% of the profit you make.

How to reduce your tax bill?

Here are some useful tips if you think you’ll be realizing large capital gains:

  1. Maximize your RRSP. If you have unused contribution room when you sell your property, contributing to your RRSP will allow you to reduce the tax consequences of capital gains. If you are over 71 years of age and your spouse is younger, you can still contribute to the RRSP of which she or he will be the beneficiary.
  2. Use capital losses carried forward from previous years. This may allow you to reduce the additional tax you would have to pay on capital gains.
  3. Leave your property to your spouse if you expect you will still own it at the time of your death. This will defer taxation of the capital gains until your death. Taxes on capital gains will be paid by your estate.

Selling a principal or secondary residence is a very important decision and shouldn’t be taken lightly. You need to take into account the tax consequences of selling a residence. Don’t hesitate to contact your advisor if you need help exploring your options and making the right choice.


* Several changes were made to the law between 1972 and 2001. These changes could affect the amount of the exemption. During this period, if you were the owner of a primary or secondary residence, which you still own today (sale, donation, death), it would be important to consult an expert on the matter.