Capital Gains on Selling a Cottage in Ontario 2025

What capital gains taxes apply when you sell an Ontario cottage? Inclusion rates, principal residence exemption strategy, and how to minimize your tax bill.

📊 Capital Gains 2025 🏡 Cottage Tax Guide 💰 PRE Strategy

Do You Pay Capital Gains on a Cottage Sale?

Yes — if your cottage is not your designated principal residence, the gain (selling price minus adjusted cost base) is a taxable capital gain. This is one of the most significant financial considerations for Ontario cottage owners who have held properties for many years and seen substantial appreciation.

Unlike your primary home (which is often fully exempt via the principal residence exemption), most Ontario cottages are subject to capital gains tax when sold. Planning ahead can significantly reduce this liability.

Capital Gains Inclusion Rates (2025)

Capital gains in Canada are taxed on an "inclusion rate" — a percentage of the gain is added to your income and taxed at your marginal tax rate:

Capital Gain AmountInclusion RateNotes
First $250,000 (annual)50%Standard inclusion rate
Over $250,000 (annual)2/3 (66.67%)Higher rate for large gains
The federal government proposed increasing the inclusion rate for gains over $250,000 annually from 50% to 2/3 starting in 2024. The status of this change has been subject to political developments — consult a tax advisor for the current rules applicable to your situation.

Example: Muskoka Cottage Capital Gains

ScenarioAmount
Purchase price (1990)$180,000
Improvements added to ACB$70,000
Adjusted cost base (ACB)$250,000
Sale price (2025)$1,100,000
Capital gain$850,000
Taxable portion (50% on $250K, 2/3 on $600K)$125,000 + $400,000 = $525,000
Tax owed (~40% marginal rate)~$210,000

The Principal Residence Exemption (PRE)

The principal residence exemption (PRE) is the most powerful tool for reducing capital gains on cottage sales. It eliminates capital gains on years the property is designated as your principal residence. Key rules:

Strategic PRE Designation

If you own both a home and a cottage, you can strategically split PRE years between the two properties to minimize total lifetime capital gains. For example: designate the cottage as principal residence for the years it appreciated fastest, and the home for years the home appreciated fastest. This requires careful planning — work with a tax accountant BEFORE you sell.

What Counts as Adjusted Cost Base (ACB)?

Your ACB determines your capital gain. Include in ACB:

Keep records of all cottage improvements. A well-documented ACB can reduce your capital gain significantly on a cottage held for decades.

Death and Deemed Disposition

When a cottage owner dies, CRA treats it as if the cottage was sold at fair market value. This "deemed disposition" can trigger substantial capital gains taxes in the estate. Options to plan for this include:

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FAQs: Cottage Capital Gains in Ontario

Do I pay capital gains if I give the cottage to my children?

Yes — transferring a cottage to anyone other than a spouse is treated as a disposition at fair market value. Capital gains apply on the deemed proceeds. This is a common estate planning challenge for Ontario cottage families.

Can I use the principal residence exemption on my cottage?

Yes, if you ordinarily inhabited the cottage (even seasonally). The PRE can apply to any property you lived in, but only one property per year per family unit. Strategic designation between your home and cottage can significantly reduce taxes — get professional advice.

What's the capital gains inclusion rate in 2025?

50% on the first $250,000 of annual gains. The federal government proposed 2/3 inclusion on gains above $250K — the exact status depends on current legislation. Consult a tax advisor for the latest rules.

This is general information only and NOT tax advice. Capital gains rules are complex and frequently change. Always consult a qualified Canadian tax professional for your specific situation before making decisions about cottage ownership or sale.