Cottage season is a sacred Canadian tradition, but as any seasoned vacationer knows, there’s always a little work to do before you can actually hit the dock. Between opening up the water lines and sweeping out the spiderwebs, it’s easy to forget that your getaway is also a major financial asset—and the CRA doesn’t take vacations.

If you own a vacation property, or are thinking about selling one, there are several tax and estate hurdles you’ll need to clear. From the intricacies of capital gains to the surprising quirks of interprovincial estate law, here is what you need to know to keep your slice of paradise from becoming a tax nightmare.

1. The Capital Gains Crunch

In Canada, you don’t pay tax on the profit from selling your “principal residence.” However, you (and your spouse) only get one principal residence designation per year. It is possible that the vacation property might be considered your principal residence, but it’s important to get professional advice before declaring anything to the CRA.

If you sell your cottage and it has increased in value, you generally have to pay capital gains tax on that profit. As of 2026, the inclusion rate stands at 50%. This means if you bought a cabin for $400,000 and sold it for $700,000, $150,000 (half of the $300,000 gain) is added to your taxable income for the year and taxed at your marginal rate.

The Capital Gains Reserve: Don’t Pay All at Once

If you sell your property but don’t receive the full payment immediately—for example, if you offer a “vendor take-back mortgage” to the buyer or sell to a relative—you might not have to pay the full tax bill in year one.

The Capital Gains Reserve allows you to spread the tax over a maximum of five years. You generally must report at least 20% of the gain each year. This is a powerful tool if the sale would otherwise push you into the highest tax bracket; by spreading it out, you might keep more of that money in your pocket. This can save families tens of thousands of tax dollars. If you’re thinking of transitioning a property in the family using the Capital Gains Reserve, it’s important to discuss this with a qualified accountant and ensure that planning is done correctly.

2. Foreign Property: The T1135 Trap

Many Canadians look south for their vacation fix. If you own a condo in Florida or a villa in Mexico, you need to be aware of the T1135 (Foreign Income Verification Statement).

• The Rule: If you own “specified foreign property” with a total cost of more than $100,000 CAD at any point in the year, you must file a T1135.
  
• The Exception: Crucially, property held primarily for personal use (like your own vacation home) is generally exempt from T1135 reporting.
  
• The Catch: If you start renting that Florida condo out for a significant portion of the year to “cover the carrying costs,” it may lose its “personal use” status. Suddenly, you’re looking at hefty penalties—$25 per day, up to $2,500—just for failing to file a disclosure form.

If you are at all unsure about if you’re required to file the T1135, it’s important to speak to a qualified professional.

3. The “Two Will” Strategy (an Ontario/Quebec example)

This is where things get legally “fun.” Although this example is about Ontario and Quebec, it applies to most situations where you live in one province, but own real estate in a different jurisdiction.  If you live in Ontario but own a cottage in Quebec, your Ontario will might not be enough.

Probate and the Provincial Border

In Ontario, when you pass away, your estate usually pays an Estate Administration Tax (Probate) of roughly 1.5% on assets over $50,000. Quebec, however, has a completely different legal system (Civil Law vs. Common Law).

• Quebec Quirks: In Quebec, notarized wills often don’t require probate at all. However, an Ontario executor (called a “Liquidator” in Quebec) may find it incredibly difficult to transfer a Quebec property using only Ontario documents.
  
• The Solution: Many owners use multiple wills. You might have one will for your Ontario assets and a separate “situs will” specifically for your Quebec property. This can speed up the process for your heirs and, in some cases, help minimize the total probate tax paid across both provinces.

4. The Short-Term Rental Reality Check

With the rise of platforms like Airbnb and VRBO, many owners are turning their cottages into businesses. But the CRA has recently tightened the screws.

GST/HST Obligations

If your gross rental income (plus income from any other “commercial” activities you run) exceeds $30,000 in a 12-month period, you must register for and collect GST/HST.

Pro Tip: Even if you make less than $30,000, you might want to register voluntarily so you can claim Input Tax Credits (ITCs) on expenses like renovations or furniture—but be warned: doing so makes the eventual sale of the cottage potentially subject to HST.

Expense Denials

Under recent rules, if you are operating a short-term rental in a municipality that has banned them (or if you don’t have the proper local license), the CRA can deny all your expense deductions. You’ll be taxed on the gross revenue without being able to subtract property taxes, utilities, interest or insurance.

5. Don’t Forget the “Paper Trail”

When you sell a cottage, your “profit” is the Sale Price minus your Adjusted Cost Base (ACB). Your ACB isn’t just what you paid for the place in 1994. It includes:

• Legal fees and land transfer tax from the original purchase.
• Capital improvements made in order to make the property usable (indoor plumbing, the winterized bunkie, the upgraded septic system).

Maintenance (painting the deck) doesn’t count, but improvements (replacing the deck with a larger one) do. Keep every receipt. In twenty years, those scraps of paper could be worth thousands in tax savings.  Note that these need to be in the first year of ownership to count.

6. The Bare Trust Debacle

For years, CRA has been talking about the requirement for Bare Trusts to file a T3 Trust return.  In 2023, CRA required us to file T3s for Bare Trusts, and less than 72 hours before the filing deadline, CRA removed the filing requirement. The result was trusts formalized that hadn’t been previously, a lot of extra work from accounting firms preparing to manage these returns, and clients who paid to have these returns filed, and they ended up not being required.

We fully expect this filing requirement to return in the future.  Possibly this year.

What is a Bare Trust?

A Bare Trust exists when an individual is on the record of ownership for an asset they do not actually control, own or benefit from. Some common scenarios we’ve seen include:

• A child being on the bank account for an elderly parent to help them pay their bills and manage their finances;
• A parent being on title for a home and on the mortgage to help the child get a better mortgage rate;
• A parent owning a car that is exclusively for the child’s use.

These are some basic scenarios, but pretty much any time someone appears as an owner, but is “In name only,” a Bare Trust situation exists.

Currently, Bare Trusts are not required to file, but the government has repeatedly indicated that this is coming. At this time, there is little concrete guidance from the CRA about what kind of bare trusts will be required to file and some exceptions were previously listed. For instance, if the asset value is less than $50,000, reporting was not required. It is uncertain if this exception will still be there the next time Bare Trusts are required to file.

We don’t know what the landscape will look like when this comes around again, but for vacation properties, consider who owns the property and who benefits from it.  For instance, if an elderly parent owns the property, but is no longer physically able to use it, and the children still get to enjoy it, a Bare Trust arguably exists.

Be sure to build this future filing requirement into your family budget as Trust filings are significantly more expensive than personal tax filings often starting around a thousand dollars.

The Bottom Line

Vacation properties are an investment in making memories, not a financial investment. Without a bit of tax planning, the legacy you leave behind could be a giant headache for your family. Whether it’s choosing which house to designate as your “principal residence” or ensuring your will is valid across provincial lines, a little bit of proactive accounting goes a long way.

If you’re looking at a sale or wondering how your estate plan stacks up, let’s chat. We’ll worry about the CRA so you can get back to the lake.