Dale Jackson

Personal Finance Columnist, Payback Time

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Canadians across the land are looking forward to another season of fun and relaxation at the cottage. For Canadians entering retirement, the annual pilgrimage could be evolving into something closer to permanent.

If you’re torn between the house and a second property, there are big tax implications that center on the principal residence tax exemption. Under the exemption, any gains in the value of a principal residence are not taxed. In other words, if your house gained in value by $400,000 above the purchase price, you do not have to pay tax on the $400,000. If it was an equity stock outside of a registered retirement savings plan (RRSP), or tax free savings account (TFSA), half of it would be subject to taxation.

Property owners who split their time between home and the cottage could risk missing out on all the benefits of the principal residence tax exemption.

Here’s what I mean: homes in urban areas have generally appreciated in value more than cottages. Even if a cottage appreciated in value more on a percentage basis, the total dollar value of a home is usually higher. By making your cottage your principal residence now, you could be stuck with a big capital gains tax bill from the eventual sale of your house in the city.    

Property owners can choose which of their residences is principal – but the Canada Revenue Agency has stipulations that could make that decision for you.    

The CRA will look the length of time in a dwelling, primary income sources and patterns of buying, living, moving and selling to determine if the home is a principal residence.

Keep in mind that that the occupancy requirement must be met for each year that you want to make the designation.