Capital Gains Tax on Cottages and Investment Properties in Ontario: What the 2026 Rules Actually Say
The proposed federal capital gains tax increase on cottages and investment properties was cancelled. Prime Minister Mark Carney announced on March 21, 2025, that the government would not proceed with the planned hike in the capital gains inclusion rate from 50% to 66.67%. The current enacted rate remains 50% for all individual taxpayers in Canada.
This means that if you sell your Ontario cottage or investment property in 2026, only half of your net capital gain is included in your taxable income and taxed at your marginal rate — the same rule that has applied for years. The 66.67% rate that generated widespread anxiety in 2024 was never made law and does not apply to any sale you make today.
However, capital gains tax on second properties remains significant. The principal residence exemption does not automatically protect a cottage or rental property, and without proper planning — including a complete Adjusted Cost Base record, a principal residence designation review, and estate transfer strategy — Ontario families may pay considerably more tax than necessary.
The Tax That Worried Ontario Cottage Owners — And Where Things Stand Now
In April 2024, the federal government proposed raising the capital gains inclusion rate — the portion of your investment profit that gets added to your taxable income — from 50% to 66.67% for individuals. For Ontario families who owned a cottage, a rental unit, or any investment property, the coverage was alarming. Headlines warned of massive new tax bills on properties that had grown in value over decades.
The good news: that proposed increase did not become law. After being deferred in January 2025, it was cancelled entirely by Prime Minister Mark Carney on March 21, 2025. The capital gains inclusion rate in Canada is currently 50% and remains unchanged for 2026.
That said, capital gains tax on second properties is still real, still significant, and still something Ontario families frequently get wrong. This guide explains how the rules actually work in 2026, what strategies may help reduce the amount you owe, and what to watch out for whether you are selling, gifting, or inheriting a cottage or investment property.
Is This You? Pick Your Situation
Capital gains rules apply differently depending on how you are dealing with the property. Find your situation below and jump to the section that matters most to you.
If you are planning to sell a cottage or vacation property in 2026, start with How Capital Gains Tax Works to understand the 50% inclusion rate and a worked example of what you may owe.
If you received a cottage through an estate, jump to When a Cottage Owner Dies to understand deemed disposition on death and what the executor must file with the CRA.
If you are thinking of giving a cottage to a child or family member, read Selling vs. Gifting vs. Inheriting first. The deemed proceeds rule may surprise you.
If you own a rental unit in Toronto, Scarborough, or the GTA, the same capital gains rules apply on sale. See How Capital Gains Tax Works and Three Legal Tools for planning options.
How Capital Gains Tax Works on a Second Property in Ontario
When you sell a cottage, rental unit, or investment property, the CRA taxes a portion of your profit. That profit is called a capital gain — the difference between what you sold the property for and what it cost you to acquire and improve it (your adjusted cost base, or ACB).
The inclusion rate determines how much of that gain gets included in your taxable income. At the current rate of 50%, if your gain is $500,000, only $250,000 is added to your income for the year. That $250,000 is then taxed at your marginal tax rate — the combined federal and Ontario provincial rate that applies to your total income for the year.
Ontario’s combined top marginal tax rate can exceed 53%, so a large cottage gain may significantly push your total taxable income into a higher bracket. However, Canada uses graduated (marginal) rates, meaning only the portion of income above each threshold is taxed at the higher rate.
One important point about the 2024 media coverage: many articles discussed a $250,000 annual threshold as a key decision point. That threshold only mattered under the proposed 66.67% rate, which applied to gains above $250,000. With the rate back at a flat 50% for all individuals, the threshold is no longer a factor in your calculation.
Your primary residence — the home you ordinarily live in — is fully exempt from capital gains tax under the principal residence exemption. Cottages, vacation properties, and rental units do not receive this exemption automatically. They are taxed on any gain you make when you sell or transfer them.
For information on how Ontario real estate transactions work from a legal closing perspective, including title transfer and closing costs, Nihang Law’s real estate team can help.
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Ontario Cottage Sale: How Capital Gains Tax Is Calculated
Illustrative example — $750,000 sale price. Impact of documenting capital improvements on your ACB and final tax bill. All figures are estimates for illustration only.
Source: Canada Revenue Agency — Capital Gains (T4037), canada.ca • Nihang Law Professional Corporation • Law Society of Ontario • Figures are illustrative estimates only. Tax outcomes vary by individual income, holding period, and documented costs. Consult a tax professional for your specific situation.
Selling vs. Gifting vs. Inheriting: How Capital Gains Tax Applies Differently
How you dispose of a second property — whether you sell it, give it away, or leave it in your estate — changes who files the tax return, but it does not eliminate the capital gains tax. Here is how the three main scenarios compare.
A deemed disposition means the property is treated as if it was sold at its fair market value, even if no money changes hands. This rule is central to understanding all three scenarios below.
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Capital Gains Disposition Scenarios: Sale vs. Gift vs. Inheritance
How the Income Tax Act (Canada) treats each type of property transfer — and where the spousal rollover applies.
| Disposition Type | Capital Gains Tax Triggered? | At What Value? | Spousal Rollover? | Who Reports the Gain? |
|---|---|---|---|---|
| Arm’s-length sale (to unrelated buyer) |
Yes | Actual sale price | No | Seller — current year T1 |
| Gift / below-market transfer (to child or family member) |
Yes | Fair market value at time of gift (ITA s. 69 deemed proceeds rule) |
No | Transferor — current year T1 |
| Transfer on death (no spousal rollover) |
Yes | Fair market value immediately before death (ITA s. 70(5) deemed disposition) |
No | Executor — terminal T1 return |
| Transfer to surviving spouse or common-law partner |
Deferred | Rolled over at original ACB Gain deferred to spouse’s future sale |
Yes | Surviving spouse — on future T1 |
Source: Income Tax Act (Canada), R.S.C. 1985 s. 69, s. 70(5) • Canada Revenue Agency T4037 • Nihang Law Professional Corporation • Law Society of Ontario • This table is for informational purposes only and does not constitute legal advice.
The most important concept here is the deemed proceeds rule under the Income Tax Act (Canada). When you transfer property to a family member below its fair market value — even as a gift — the CRA treats you as if you received the full fair market value. You report the capital gain. The recipient receives the property at fair market value as their new cost base.
This means gifting a cottage does not avoid capital gains — it simply moves when the tax is paid. The person who receives the gift may face their own capital gains tax when they eventually sell. For questions about structuring a property transfer properly, estate planning and will preparation guidance from a lawyer can help identify the right approach for your family.
Three Legal Tools That May Reduce What You Owe
While capital gains tax on second properties cannot typically be eliminated, three strategies may meaningfully reduce what you owe. Each one requires documentation and professional review to apply correctly.
Build Your Adjusted Cost Base (ACB)
Your adjusted cost base (ACB) is the total of what you paid for the property plus all eligible acquisition costs and capital improvements. A higher ACB means a smaller capital gain and a lower tax bill.
Eligible costs that can be added to your ACB include: the original purchase price, Ontario Land Transfer Tax paid at original purchase, legal fees paid when you bought the property, real estate commissions at purchase, and the cost of capital improvements — things like a new roof, a rebuilt dock, a septic system replacement, or a major addition to the structure.
Most cottage owners significantly understate their ACB because they have not tracked improvements made over decades of ownership. Even rough records — old invoices, contractor receipts, photos with dates — may help support a higher ACB claim. A professional review of your available documentation before you sell can make a meaningful difference.
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What Can Be Added to Your Adjusted Cost Base (ACB)?
A higher ACB means a smaller capital gain and a lower tax bill. These are the costs the CRA may allow you to add — and the ones that do not qualify.
Source: Canada Revenue Agency — Capital Gains (T4037), canada.ca • Nihang Law Professional Corporation • Law Society of Ontario • This table is for informational purposes only. Eligibility of specific costs should be confirmed with a tax professional.
Review Your Principal Residence Designation
A cottage can qualify as a principal residence for any year in which you or a family member ordinarily inhabited it — even if you only spent summers there. Designating the cottage as your principal residence for specific years may reduce or eliminate the gain attributable to those years.
The key limitation: only one property per family unit per calendar year may carry the designation. “Family unit” means you, your spouse or common-law partner, and your minor children. If you own both a city home and a cottage, designating the cottage as your principal residence for certain years means your city home does not receive the exemption for those same years.
Families sometimes use a split-year strategy — allocating the designation to whichever property had the larger gain in a given year. This approach requires careful CRA Schedule 3 filings and is worth reviewing with a tax professional and a real estate lawyer before you proceed.
Consider the Timing of Your Sale
Because capital gains are added to your regular income and taxed at your marginal rate, selling in a year when your other income is lower may reduce the effective rate applied to the gain. If you plan to retire, for example, selling the cottage in a low-income year after retirement may be more tax-efficient than selling while you are at peak earning years.
Another option in some circumstances is a vendor take-back mortgage, where the seller finances part of the purchase for the buyer. This can spread a capital gain across multiple calendar years rather than recognizing it all at once. These arrangements are complex and require proper legal documentation. A real estate lawyer can advise on whether this structure may be appropriate for your sale.
When a Cottage Owner Dies: What Happens to the Capital Gains Tax
Under the Income Tax Act (Canada), when a person dies, all of their capital property — including a cottage or investment property — is subject to a deemed disposition (meaning the CRA treats it as if the property was sold at its fair market value immediately before death, even though no actual sale occurred). The capital gain this creates must be reported on the deceased person’s final tax return, called the terminal T1 return.
This can be a significant and unexpected tax liability for an estate. If a cottage appreciated substantially over many years, the deemed gain may be large enough to trigger a significant tax bill that must be paid before the estate is distributed to beneficiaries.
There is one important exception: if the property passes to a surviving spouse or common-law partner, the ITA allows it to be rolled over at the deceased’s adjusted cost base, deferring the capital gain until the surviving spouse or common-law partner eventually sells or gifts the property. This spousal rollover does not eliminate the tax — it postpones it.
Separate from capital gains tax, Ontario also imposes an Estate Administration Tax (commonly called probate) on the value of the estate that passes through the will. The rate is 1.5% on the value of the estate above $50,000. This is a separate tax from capital gains and applies to the total estate value, not just the capital gain. For more on how this process works, see our guide on Ontario probate and estate administration, where Qasim Ali, Principal Lawyer at Nihang Law and the Nihang Law team can guide executors through the process.
The executor of the estate is responsible for obtaining a professional property valuation, calculating the capital gain on the deemed disposition, and including it correctly on the terminal T1. Failing to account for this accurately can expose the estate to CRA reassessment and interest charges.
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Capital Gains Tax Timeline: 2024 Proposed Hike to 2026 Current Status
The full policy arc — from the 2024 Budget proposal through cancellation — and what the current rules mean for Ontario property owners in 2026.
Source: Prime Minister of Canada — PM Carney Cancels Capital Gains Tax Increase (March 21, 2025), pm.gc.ca • Department of Finance Canada • Canada Revenue Agency • Nihang Law Professional Corporation • Law Society of Ontario
Seven Mistakes Ontario Property Owners Make With Capital Gains Tax
It does not. The Income Tax Act deems any transfer below fair market value to occur at fair market value for the transferor. You may owe the same amount of tax on a gift as on an arm’s-length sale.
Every eligible improvement adds to your adjusted cost base and reduces your taxable gain. Decades of receipts for a new roof, dock, foundation work, or septic system can make a meaningful difference. Many cottage owners lose this benefit simply because they never kept the records.
The proposed rate increase was cancelled by Prime Minister Carney on March 21, 2025. The current capital gains inclusion rate for individuals in Canada is 50%. Any calculations or planning based on the higher rate may need to be revisited.
Ontario Land Transfer Tax paid at original purchase, legal fees at closing, real estate commissions, and survey fees at the time of purchase are all eligible to be added to your adjusted cost base. Many sellers overlook these costs from decades earlier.
You can designate only one property per family unit per calendar year as a principal residence. In some cases, allocating the designation across years between two properties — giving each property the designation for the years it had the highest gain — may reduce your overall tax. Missing this option can result in unnecessary tax on one property.
When a cottage owner dies, the deemed disposition must be calculated at fair market value as of the date of death. An informal or inaccurate estimate may trigger CRA reassessment. A qualified property appraiser can establish a defensible value at the right point in time.
Your real estate lawyer handles title transfer and closing, but is generally not in a position to provide tax planning advice. For cottages held for many years, or properties being transferred within a family, the legal and tax dimensions may need separate professional attention before you sign anything.
Frequently Asked Questions
Thinking About Selling or Transferring a Property in Ontario?
Capital gains tax on cottages and investment properties is real — but it is also manageable with the right planning. Strategies like building an accurate adjusted cost base, reviewing your principal residence designation, and thinking carefully about the timing and structure of a transfer can all make a meaningful difference in what you owe.
The most effective time to get legal and tax advice is before a transaction, not after. Whether you are planning a sale, navigating an estate, or thinking about a family property transfer, the decisions you make early can have lasting financial consequences.
Nihang Law provides real estate legal services in Ontario — including title transfers, closing support, and guidance on the legal dimensions of cottage and investment property sales across Toronto, Scarborough, and the GTA.
Ready to talk through your situation? Our team is here to help.
Contact Nihang Law
About the Author
Qasim Ali
Principal Lawyer · Nihang Law Professional Corporation · Toronto & Scarborough, Ontario · Law Society of Ontario
Qasim Ali is the Principal Lawyer at Nihang Law Professional Corporation, serving clients across Toronto, Scarborough, and the broader Greater Toronto Area. He provides full-service legal representation across immigration, real estate, family law, criminal law, civil litigation, employment law, wills and estates, and business law.
Nihang Law is particularly recognized for its depth in immigration and real estate law — a combination that serves newcomers and growing families navigating both legal systems simultaneously.
Learn more about Qasim Ali →Sources & References
- Government of Canada — Prime Minister Carney Cancels Proposed Capital Gains Tax Increase (March 21, 2025): pm.gc.ca
- Canada Revenue Agency — Capital Gains (T4037 Guide): canada.ca/CRA/T4037
- Department of Finance Canada — Deferral of Capital Gains Inclusion Rate Change (January 31, 2025): canada.ca/finance
- Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Supp.) — s. 40(2)(b), s. 69, s. 70(5): laws-lois.justice.gc.ca
- Ontario — Estate Administration Tax Act, 1998, S.O. 1998, c. 34, Sched.: ontario.ca/laws
- Federation of Ontario Cottage Associations (FOCA): foca.on.ca
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