How vacation property upgrades save tax

Anyone who owns a vacation property will eventually face a tax bill when the property is sold or transferred, assuming its value has increased. You or your estate will owe tax on 50% of the capital gain, payable in the year of the sale or transfer.

However, the taxable amount isn’t simply based on the difference between the property’s current value and its original value when you purchased or inherited the cottage, cabin or chalet. The original value is the cost base, but the capital gain is determined by the adjusted cost base. You can add eligible upgrading costs to the original value, which reduces the capital gain and saves you tax.

Eligible expenses

Eligible upgrades are capital expenses, which the Canada Revenue Agency (CRA) describes as expenses that extend the useful life of your property or improve it beyond its original condition. For example, capital expenses could include replacing a shingle roof with a metal roof, adding a new room or installing better windows. Also eligible is the replacement of a separate asset within your property, such as the cost of a new septic tank.

Costs that don’t qualify

The cost of replacing, repairing or painting any item or property does not qualify as a capital expense if you’re only restoring the property to its original condition. So, fixing a dock is not a capital expense, but replacing a dock with a larger one would qualify.

Be sure to keep your receipts or other proof of payments in case the CRA asks you to support your claim.