Victoria Day weekend marked the beginning of cottage season for many Canadians. One of the most common tax questions asked this time of year by vacation property owners is what happens if I were to sell the property – would I have to pay tax?
Around this time last year, the Canada Revenue Agency issued a technical interpretation letter in response to a taxpayer who asked whether a capital gain on the sale of his cabin could somehow be sheltered from tax.
The taxpayer, in his letter, explained that when he bought the cabin, it was “in very poor condition” and the taxpayer had to invest money to make the property livable. The taxpayer specifically wondered whether any exemption could apply to eliminate the potential capital gain that may arise when he sold it.
The CRA went through the tax rules governing the ownership, and subsequent sale, of personal-use property, which refers to items that you own primarily for your own (or your family’s) personal use or enjoyment. It typically includes all personal and household items, like furniture, cars, boats and recreational real estate.
In order to properly calculate any tax owing on the sale of your cottage, you take the proceeds of disposition from the sale of your property, less any outlays and expenses incurred by you to sell the property (such as real estate commissions) and deduct from this your “adjusted cost base” (ACB), or tax cost, of the property.
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