Make the most of your cottage

December 2, 2013 | Last updated on December 2, 2013
2 min read

Your cottage is worth a lot more than it used to be.

In fact, over the past decade, cottages and second homes have seen the largest growth rate for any personal asset class, and almost three quarters of all second homes are owned by childless couples or seniors who could benefit from renting them out.

The revenue potential can be considerable. Higher-end cottages—three bedrooms or more—in Prince Edward Island’s Prince Region, Quebec’s Laurentides Region, Ontario’s Muskoka or on Vancouver Island can command thousands per week.

By renting your cottage out for the stretches of summer when the family won’t be around, you can achieve two important objectives: you’ll have the comfort of knowing the cottage is occupied during the busiest period of the year, when it might otherwise be a target for theft or vandalism. And it will generate rental revenue to help offset the cost of maintenance, property insurance and local taxes. What’s more, this second goal can be accomplished in a tax-effective manner.

Accounting for rental income

The figure that matters for tax purposes is net rental income. This is the amount that will be included in the income column on your tax return.

Figuring it out takes a bit of work, however.

Net rental income is revenue, less expenses. Revenue in this case is simply the gross rent that’s collected. The expenses figure is more complicated since it includes both direct and indirect costs. Direct costs are items specifically related to the rental process such as advertising, cleaning, or renters insurance. Indirect costs are expenses made regardless of rentals, including general insurance coverage, repairs and maintenance, utilities, and property taxes.

As in any exercise that has tax implications, you should keep thorough records.

It’s about more than money

Periodic cottage rentals will not make you rich. You’ll probably end up with enough money to offset expenses, leaving a small amount of net rental income that will add to your taxable income. Of course, if expenses surpass rental income, there will be a rental loss which normally can be deducted against other income.

Strictly speaking, renting a vacation property is not about making a profit. By generating revenue that offsets the cost of operating a second property, you free up other income. And by keeping a property occupied and secure in periods when it would otherwise be vacant and potentially vulnerable, you are helping to preserve the value of your investment.

Michelle Munro is director, tax planning, for Fidelity Investments Canada ULC.