Tax deductible expenses when selling a cottage

Minimize capital gains taxes by making smart reno choices

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Q: We are planning to sell the cottage in the next year or so and I would like to know what kind of renovations/improvements can qualify as capital costs? Please note that I have retained receipts.

Changing a shingle roof to a metal one?

Changing old windows to new ones?

Replacing an old deck/stairs with new ones?

Replacing an old wood stove by an energy-saving one?

Replacing flooring?

I look forward to receiving your advice.

—Louise

A: When you sell a cottage, there are generally tax implications. While you can claim a cottage as your tax-free principal residence, most people save this exemption for their home.

There are a number of expenses that can be claimed to reduce the capital gain on your cottage, Louise. Generally, the Canada Revenue Agency defines a capital expense as an expense that:

– gives a lasting benefit or advantage;

– improves the existing property;

– is a separate asset; or

– is considerable in relation to the value of the property.

There is a distinction between a capital expense – which increases your cost base for capital gains tax purposes on a property – and a current expense, which is a repair. When someone owns a rental property, they generally prefer current expenses, as these are fully deductible in the year in which incurred. Capital expenses, on the other hand, are only 50% deductible as they reduce the ultimate capital gain.

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In your case, Louise, a good example of a capital expense would be your expense to change a shingle roof to a metal one. In particular, it provides a lasting benefit, is an improvement to the existing roof and is considerable in value.

The windows and flooring also provide a lasting benefit. The stove is a separate asset in its own right. So these three expenses would also generally be capital expenses that would be added to the cost of the property for capital gains tax purposes.

The replacement of the old deck and stairs may not be a capital expense, Louise. In fact, the Canada Revenue Agency gives a specific example on their website of an expense for wooden steps. If you were to replace wooden steps with concrete steps, that would be a capital expense. If you were to repair wooden steps, it would not be a capital expense. It would be a current expense or repair as opposed to a renovation or improvement. So whether the deck/stair expense is capital or current would be a matter of fact depending on the exact nature of the work.

Note that the Canada Revenue Agency does not give a specific list of capital expenses, but rather, guidelines for determining the nature of the expense.

The calculation of your cost base for tax purposes will then be equal to your original purchase price, closing costs on acquisition and capital expenses over the years. The proceeds, less the selling costs, less your cost base gives you your capital gain. Half of your capital gain is taxable on your tax return in the year of sale. A large capital gain in a high income year could give rise to 25% tax or more depending on your province of residence and your income sources.

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Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.


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