The cottage conundrum

Andy Erickson talks tax on second dwellings.

Through the principle residence exemption, your home is just about the only investment you can profit from without paying a cent in taxes.

The Income Tax Act allows this exemption on any housing unit that you, your spouse or common-law partner or your children lived in during the year. And that can include a unit in a condo or apartment building, or even a cottage, mobile home or houseboat.

If you own both a home and a cottage, you can designate one or the other as your principle residence, even if you only take short vacations at your cottage. And you might want to do that for sound financial planning reasons.

Let’s take a closer look at the principle residence exemption. Your family is allowed only one principle residence each year. If you own a multiplex and rent out the other units, you can claim the exemption only for the portion of the building you inhabit.

It can make sense to designate your cottage for the exemption when, for example, your family has owned both a house and cottage for a number of years and you decide to sell your house, which has appreciated by $20,000 while your cottage has risen in value by much more. If you believe cottage prices will continue to be stable, or rise, it can be a better tax-saving strategy to place your exemption on your cottage.

If you own a house on a few hectares of land, you can generally claim the exemption only for the house and up to a half hectare of land (the rest will be subject to capital gains). The exemption may be available for all, or part of, the excess land under certain circumstances.

You will probably not lose your exemption if you take in a boarder or renter who shares your kitchen and your house. You will likely lose the exemption for any portion of your home to which you make structural changes to create a self-contained apartment.

If you move out of your house to rent it, you will be deemed to have sold it at fair market value. Because it was your principle residence, the immediate gain may be eliminated or reduced, but any future gain will usually be taxable. There are, however, some planning opportunities that may allow you to extend the exemption into the years after the conversion.

The best tax-saving principle residence exemption strategy for you depends on many factors, including your overall financial and retirement goals. Your professional advisor can help you make the right choices for you and your family.

Andy Erickson is the division director with Investors Group, Vernon. This article is provided for information purposes only. Consult with a professional advisor before implementing a strategy.