Capital Gains Tax Hike Spooks Canadian Cottage Owners

Will Canadian cottage owners list their vacation homes in the coming months? This remains to be seen, with the federal government poised to raise the capital gains tax this summer.

Prime Minister Justin Trudeau and his Liberal government announced in the 2024 budget that Ottawa will implement higher taxes on capital gains on annual amounts in excess of $250,000. The tax hike, which boosts the inclusion rate from 50 per cent to 66.7 per cent, would be applied to gains realized after June 25.

Some industry observers say this could significantly affect cottage owners, as they have witnessed rocketing home values over the last four years. A chorus of market watchers note that it would make sense to consider your options before the deadline, because the savings (or cost) could total tens of thousands of dollars.

Under the current tax structure, if a cottage is bought for $250,000 and sold years later for $750,000 – $500,000 profit – sellers would face a capital gains tax of $250,000. Starting on June 25, the $500,000 profit would be taxed 50 per cent for the first $250,000 and an extra 66.7 per cent for every dollar above $250,000.

The Federation of Ontario Cottages’ Association (FOCA) estimates this could negatively affect approximately 150,000 seasonal cottage owners in the province “when it comes time for them to transfer the cottage to the next generation.”

“Contrary to the government’s characterization, these individuals are not among the wealthiest 0.13 per cent of Canadians, but rather hard-working middle-class families who have cherished these properties as part of their heritage and family legacy for generations,” said Lesley Lavender, the CEO of FOCA, in a letter to Prime Minister Trudeau and Finance Minister Chrystia Freeland.

She added that the 60-day notice is “insufficient” for a sizeable change as it “could have a dramatic impact on the financial position of middle-class Canadian families.”

Homeowners in Ontario’s cottage country are taking notice, says John Fincham, a realtor at RE/MAX Parry Sound Muskoka Realty.

“I’ve had calls, so far just clients trying to get clarification, but there’s going to be people that have decided that the capital gains tax adjustment is the last straw and it’s time to get into the market to sell,” he told the Financial Post. “Why wouldn’t … those with secondary properties like cottages strive to sell in the coming months?”

Ultimately, housing market professionals are urging families to seek professional assistance for financial and tax help.

However, while Canadian officials say this would impact a small number of individuals, new data suggest it would affect a sizeable part of the country’s population.

Cottage Ownership in 2024

According to a recent Leger survey commissioned by RE/MAX, 13 per cent of Canadians own a recreational home. This includes six per cent who purchased before 2020, three per cent who bought after 2020, and three per cent who inherited a cottage. Additionally, eight per cent of Canadians plan to buy a recreational home.

Heading into budget season, many Canadian cottage owners had already sold one of their properties amid the elevated cost of living and rising interest rates. The survey revealed that more than a quarter (28 per cent) had sold their cottages.

Of those who still own their cottages, nearly half (45 per cent) say they can no longer afford to keep or maintain them and are thinking about selling these cottages. Meanwhile, 29 per cent plan to sell their recreational homes in the next year due to new regulations, affordability issues, and inflation pressures.

For those who are on the outside looking in, close to half (46 per cent) note that an affordable purchase price is their top consideration for buying a cottage, up from 43 per cent in 2023. This is followed by proximity to water (35 per cent), access to seasonal amenities (27 per cent), and all-season access to emergency services (27 per cent).

A Setback for Potential Cottage Sellers?

Fincham added in an interview with the newspaper that a key challenge for prospective cottage sellers is that the Ontario cottage market is already experiencing ample supply. “We’re looking at well over 700 cottages currently on the market. That’s a significant number,” he said. “The supply far outweighs the demand, which is already quite weak.”

Should there be a flood of fresh supply, cottage prices would decline across the Ontario real estate market. Home prices in popular Ontario cottage locations have already eased over the past year.

According to the Lakelands Association of REALTORS®, which represents jurisdictions in the heart of Canada’s cottage country, the composite benchmark price was $679,400 in March 2024, down 1.1 per cent from the same time a year ago. Bonnie Looby, the association head, noted that there has been a rebound in new listings.

If you are considering buying a cottage, this could be an opportunity to get your foot in the door and start enjoying nature with your family. Contact a RE/MAX agent today.