taxes – BIG

Owning a cottage comes with extra responsibilities, particularly come tax time. Though more than 155,000 workers at the Canada Revenue Agency and the Treasury Board voted to strike late on April 18th, you still need to file your taxes before the April 30, 2023 deadline to avoid paying penalties.

You might be wondering if there are any special considerations you should be aware of before filing. A good CPA will always guide you in the right direction, but if you’re still handling your taxes yourself, or curious about the tax implications of buying a cottage—here are a few tax considerations you’ll want to keep in mind.

The Staycation Tax Credit

The Staycation Tax Credit was first introduced by the Ontario government in 2021 as a way to bolster travel within the province when out-of-country travel was still challenging due to the pandemic. It was also introduced with the intention of helping Ontario businesses bring in new income as the travel and hospitality industry suffered a huge hit during periods of lockdown.

So, if you live in Ontario and you rented a cottage in Ontario in 2022, you can claim the rental fee you paid and receive a tax credit. “The credit applies mainly to lodging—you can’t claim it on flights, gas, or admission to different parks and amenities,” says Jeanette Chong, a CPA at Canadian Bookkeeping Services. The credit amounts up to $200 for an individual and $400 for a family. “You may need to provide proof, so always keep your receipts for at least seven years,” Chong says. “Since it is a refundable tax credit, you will get this credit regardless if you owe taxes in 2022 or not.”

Claiming rental expenses

If you rent out your cottage even for a short portion of the year, don’t forget to claim rental expenses on your taxes. “You can claim expenses such as property taxes, maintenance fees, and mortgage interest,” Chong says. But keep in mind that you must accurately report expenses based on the time your property was used as a rental. That means, if it was only rented out for two months of the year, you can only claim these expenses for 17 per cent of the year. “In this case, you can claim 17 per cent of property taxes, mortgage interest, and maintenance fees for the year,” she says.

When it comes to expenses related directly to renting the property, you can claim 100 per cent of these expenses. “For example, if you have a cleaning service come in after each renter to clean up, or place an ad somewhere to rent it out, then 100 per cent of those expenses can be claimed.”

Deferring capital gains

Keeping the cottage in the family over generations is a goal for most cottage owners—but that’s not as simple as it seems. When it comes to second homes like cottages, capital gains can become an expense that many children taking over the cottage from deceased parents aren’t prepared for. Especially with cottages that were bought decades ago for a small fraction of what they’re worth today. “When you pass on your cottage, the difference between what you paid for it, and what you sold it for is considered a capital gain,” Chong says. Since your children are on the hook for the capital gains tax upon your death, this bill can come as a big shock. If a cottage was bought for $70,000, for example, and is now worth in the millions, that capital gains tax bill will be large.

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But there are ways to ease this tax burden—if your cottage is now worth more than your principal residence, you can switch the cottage to your primary residence for tax purposes and have the second home capital gains tax applied to your other home instead. Alternatively, you can consider co-owning the cottage with your children now. This would require capital gains tax payment on the portion your children now own, making the portion they have to pay after your death significantly less. You can even gift it to them now in full, paying the capital gains tax up until now, so the burden is lessened for them. Of course, there is always a risk in giving up ownership of property, especially if your children have creditors, or spouses who might have other plans for it—so consider these options wisely.

“Another scenario where you can defer the capital gains is if you use that money from the sale to purchase another property,” says Chong. “In the end though, you will still have to pay the capital gains when the second property is sold.”

Expenses you can claim after selling

Finally, if you sold your cottage, don’t forget to claim expenses. “If it is not your principal residence, there are things you can claim—including the cost difference from the original purchase price of the property, land transfer taxes, real estate commissions, real estate inspections, legal fees, and renovation costs,” Chong says. A tax specialist can help ensure you’re claiming everything you legally can, so your tax responsibility will be as low as possible.

The cost of purchasing property in Ontario has become steeper for non-residents. On October 25, the provincial government increased the Non-Resident Speculation Tax (NRST) from 20 per cent to 25 per cent. This is the second tax bump to the NRST in the last year.

The NRST applies to foreign nationals, meaning someone who isn’t a Canadian citizen or a permanent resident in the country and is purchasing or acquiring residential property in Ontario. It’s a one-time tax applied at the time of sale. The government estimates that the tax will generate $175 million this year.

The government introduced the tax in April 2017 to deter foreign buyers from purchasing rental properties and driving up housing prices. At the time, the government set the tax at 15 per cent, limiting it to the Greater Golden Horseshoe Area, which stretches throughout southern Ontario, covering Niagara Falls, Toronto, Barrie, and Peterborough.

In March 2022, the tax increased to 20 per cent and expanded provincewide. The government claimed the increase was part of its pledge to fight Ontario’s housing crises, prioritizing Canadian families and homebuyers.

The October NRST bump to 25 per cent shows that the government feels foreign buyers are still a contributing factor to the province’s housing crises.

“We are working to end Ontario’s housing supply crisis—both by building 1.5 million new homes over the next 10 years, and by ensuring Ontarians are able to access our existing housing supply,” said Steve Clark, the province’s Minister of Municipal Affairs and Housing, in a statement.

The NRST increase accompanies a series of federal government initiatives aimed at improving housing affordability, including a two-year ban on foreign investment in Canadian housing, starting January 1, 2023.

The prime target of these initiatives is foreign buyers snapping up investment properties in urban centres, but Americans looking to buy a cottage are also being caught in the crosshairs.

Sara West, a realtor in Pointe au Baril, north of Parry Sound, says that the area has a strong American cottager contingent, but real estate interest from the south has been waning in recent years. “There was a fair amount of interest until there was the pandemic, so [Americans] couldn’t come,” West says. “And then there’s the tax. I’ve heard from a few American people saying, ‘I can’t buy’.”

Attracting Americans to the area stimulates the local economy, West says. American cottagers stay for long periods of time, they use local contractors and make purchases in the town’s stores. Introducing barriers will impact that.

The two-year ban on foreign investment is also confusing the issue. West was recently working with an American couple, one of whom is a Canadian citizen, to find a cottage in the area. When she started looking into the two-year ban and how it would affect the cottage purchase, she couldn’t find any information. “We called lawyers and they couldn’t tell us,” she says.

The details of the ban have yet to be published, so it’s unclear whether it will apply to cottage properties. The Finance Department did not respond to Cottage Life’s questions about what the ban will cover.

This doesn’t mean Pointe au Baril is immune to Ontario’s affordability crisis, though. West says property prices skyrocketed during the pandemic. But that wasn’t driven by American buyers, and she doesn’t think deterring them will bring prices down. It’ll just hurt local businesses, she says.

Terry Rees, executive director of the Federation of Ontario Cottagers’ Associations (FOCA), points out that it’s not just potential American buyers being targeted, it’s also Americans who’ve owned cottages in Canada for generations.

Starting January 1, 2022, the federal government introduced the Underused Housing Tax. This is an annual, one-per-cent tax on residential properties owned by non-Canadians that are occupied for less than six months a year. Three-season cottages that aren’t winterized are exempt, but Rees says that if an American owns a four-season cottage, it’s likely they’ll have to pay the tax.

“These are our friends and neighbours,” Rees says. “It’s been [FOCA’s] contention with the feds that taxation on these people has unintended consequences because it’s a penalty that really doesn’t address housing shortages or affordability.”

Americans buying cottages in Canada represent such a small segment of the real estate market that increasing their taxes likely won’t free up housing for Canadians or cause prices to ease in urban centres, Rees says. It’ll just hurt the cottage communities that Americans are a part of or want to become a part of.

“In the north, people count on [cottagers],” he says. “There’s a lot of Americans all over the province owning waterfront property, and most people are part of the community. I don’t think that the intent should be to dissuade people from investing in our rural communities.”