Cottage owners have more Tax obligations. To avoid penalties, file your taxes by April 30, 2023, even though more than 155,000 Canada Revenue Agency and Treasury Board employees voted to strike late on April 18.
Are there any special filing considerations? If you do your taxes yourself or are curious about the tax implications of buying a cottage, here are a few tax considerations.
The Staycation Tax Credit
The Ontario government introduced the Staycation Tax Credit in 2021 to encourage domestic travel during the pandemic. It was also meant to help Ontario businesses recover from lockdowns, which devastated the travel and hospitality industry.
If you live in Ontario and rented a cottage in 2022, you can claim 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 Canadian Bookkeeping Services CPA Jeanette Chong. Individuals receive $200 and families $400. Chong advises keeping receipts for seven years in case you need proof. Since it’s refundable, you’ll get it whether or not you owe taxes in 2022.
Claiming rental expenses
If you rent your cottage for even a short time, claim rental expenses on your taxes. Chong says property taxes, maintenance fees, and mortgage interest are deductible. However, you must accurately report expenses based on the rental period. If it was rented for two months, you can only claim these expenses for 17% of the year.
“In this case, you can claim 17% of property taxes, mortgage interest, and maintenance fees for the year,” she says.
You can claim 100% of rental expenses. For instance, if you hire a cleaning service after each renter or place an ad to rent it out, you can claim 100% of those expenses.
Deferring capital gains
Most cottage owners want to pass down the cottage to future generations, but it’s not easy. Many children inheriting cottages from deceased parents are unprepared for capital gains. Especially cottages bought decades ago for a fraction of their current value.
Chong says a capital gain is a difference between what you paid for your cottage and what you sold it for. After your death, your children must pay the capital gains tax, which can be a shock. A cottage bought for $70,000 and now worth millions will have a large capital gains tax bill.
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Expenses you can claim after selling
Finally, claim your cottage sale expenses. “If it is not your principal residence, you can claim 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.
Tax specialists can help you claim everything legally possible to minimize your tax liability.
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