While there are a growing number of Canadians who are opting to live on the water permanently, the majority of cottage owners still use their property for recreation purposes. In other words, this is their secondary property as opposed to a main dwelling. The distinction between primary and secondary property is extremely important when we think of taxes – especially the taxes paid on capital gains arising from the sale of a property.
Under current tax rules, an individual can designate one property as a primary dwelling as long as it was ordinarily inhabited. Even if the cottage were only used for weekends and summer vacations, it may still qualify for a primary dwelling designation. Why is this important? Simply because at the time the cottage property is sold, it may be advantageous to have it designated entirely or partially as the primary residence if the value of it exceeds its cost by a wider margin than that the main dwelling. Your tax professional is best suited to helping you with this distinction and ensure you are doing it properly.
Apart from designating your cottage as primary or secondary, it is also important to keep track of all the costs and improvements that have been made to your properties. Some of these will relate to when you purchased the property (such as the purchase price, real estate commissions, legal fees and land transfer taxes). Renovations – adding bathrooms and kitchens, building a basement or putting in a new deck – also add to the adjusted cost base (ACB) of the property. Improvements that are not considered ongoing maintenance items, like building a driveway or dock, may also be considered in assessing your property’s ACB.
One key area to watch is the septic system, as a number of municipalities are implementing tougher requirements and review processes which may reveal problems that cottage owners must rectify. Depending on the age of your cottage, the septic system may be decades old and no longer compliant with new regulations and by-laws. Considering that the replacement cost of a system can run north of $50,000 this is not only something for which you should be budgeting, but definitely a cost to track and to keep records of for that day when you might sell your dream by the lake.
By Andrew Pyle, MA, CFP, CIM, FMA, FCSI Branch Manager, Senior Wealth Advisor and Portfolio Manager, Scotia McLeod
The Pyle Group, www.pylegroup.ca