The Tax Implications of Buying a Second Home in Canada

Cottages come with unique financial considerations, as they are usually an owner’s second home. With that in mind, you’ll want to have a full understanding of the financial picture if you are planning on buying one.

The tax implications of owning two homes in Canada can differ depending on where you buy, your residency status, and other variables. Additionally, you may run into other types of taxation down the road if you choose to rent out your second home, or when you eventually sell it.

In this blog post, we’ll look at some of the high-level tax implications that come with buying a cottage or vacation home in Canada. Let’s get started.

How Does Land Transfer Tax Work For Cottages?

Land Transfer Tax (LTT) is a one-time cost applied to real estate purchased in Ontario. If you’re buying a second property, you’ll want to know how it’s calculated and how you can budget for it appropriately. LTT costs aren’t universal. Instead, they’re calculated based on a percentage of a property’s value, similar to basic property taxes.

Property Tax For Second Homes

Just like your first home, you’ll also pay annual property taxes on your second one. Beyond your mortgage, this will be one of your largest recurring expenses as a cottage owner.

Like traditional residential properties, cottages and vacation homes are assigned an assessed value from the MPAC. You will then pay property taxes to your municipality based on the assessed value of your property.

Searching for more insights on cottage ownership? Explore these related readings.

Will You Pay HST When Buying a Cottage?

In Canada, most residential real estate is exempt from Harmonized Sales Tax. Meaning you, the buyer, won’t need to pay HST on your second home.

However, there are a few key exemptions. These include:

If the property is a new build
If the property has been substantially renovated
If the property was used as an income-generating rental

Buying a Vacation Home in Canada as a Non-Canadian

While non-Canadians can buy vacation properties in eligible regions of Canada, they may face additional taxation depending on where they buy. For example, the province of Ontario (home to Cottage Country) currently imposes a 25% Non-Resident Speculation Tax on all properties bought by non-Canadians.

Will You Be Taxed If You Rent Out Your Cottage?

Converting your second home into an income-generating investment property has all kinds of financial benefits. However, it will come with new tax implications.

Even if you rent our cottage for just one weekend a year, the Government will consider your earnings to be taxable income. So, you’ll need to have an organized accounting system in place to ensure your rental business is compliant with CRA standards.

This is just one of the reasons why you should work with a professional if you plan to tap into Cottage Country’s short-term rental market (like us, Cottage Vacations Real Estate). We can help you set up a high-profit rental and ensure you’re able to hang on to as much of your returns as possible come tax season.

Will You Be Taxed When You Sell Your Cottage?

Even if you’re not planning your cottage for several years (maybe even decades), it’s a good idea to understand the financial implications in advance.

One of the best perks of cottage ownership is the ability to grow equity as its value appreciates. However, when it comes time to sell, that equity will be subject to taxation. This is called Capital Gains Tax.

Currently, the inclusion rate for this tax is 50%. If your property sells for $300,000 more than you bought it for, you’ll be taxed on $150,000. That said, there are ways to reduce the impact of capital gains tax or even avoid it altogether. For example, leveraging the Principal Residence Exception if you’re eligible.

Searching for advice on selling a cottage or second home? Read these related posts!

Your Link to Cottage Country

If you’re thinking about buying a vacation home in Canada, you’ll want to work with experts who specialize in Cottage Country’s unique market. That’s where we come in. At Cottage Vacations Real Estate, we’re passionate about helping you unlock a great lifestyle while simultaneously optimizing your net worth.

Our full-service approach to buying cottage properties means you get every question answered and every expectation met. We specialize in helping buyers understand the financial realities of cottage ownership (including taxation) and will work with you to develop a strategy to make your goal financially attainable.