# Cottage rental - change of use?



## NorthernRaven (Aug 4, 2010)

Assume someone owns a pair of adjoining summer cottage properties (call them A and B) for personal use (the person owns a separate "principal residence" in the city). At some point they decide to rent cottage B to others for a few weeks in the summer. Could this trigger a deemed "change of use" and a capital gains event?

I can't imagine it would, given the small proportion of the year involved, but I can't seem to find clear examples out there. Most involve renting part or all of a principal residence (not the case here), but there is something that sounds like this in the tax guide T4036 regarding rental income. Any knowledgeable small-time cottage owners out there?


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## NorthernRaven (Aug 4, 2010)

This column in the Globe & Mail was what go me curious. I've been amazingly unsuccessful in finding useful info about this situation on the web. There must be a goodly number of people doing part-time rentals of their cottages, and it seems hard to believe they are at risk of triggering the accumulated capital gains on the cottage when they do so. But neither can I find any description of a possible mechanism that might prevent this sort of "change-of-use" event.

Canada Revenue's "Rental Income" guide seems to go out of its way to avoid discussing this situation (income from a personal-use property that is _not_ your principal residence). I know someone who might be in this situation, and I'd love to know whether to undertake the difficult task of getting them to see an accountant, or how this might not be an issue.


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## Cal (Jun 17, 2009)

NorthernRaven said:


> This column .......and I'd love to know whether to undertake the difficult task of getting them to see an accountant, or how this might not be an issue.




Are they ill? Immobile? You could just go see an accountant yourself, and share your new knowledge with them. If an accountant services are to be needed, they would have to go see them come tax time anyways.


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## NorthernRaven (Aug 4, 2010)

No illness or immobility, but it may take some convincing to get them to see an accountant...  More generally, I've become intellectually curious about this - is there a path that part-time cottage rental income like this can take that doesn't trigger a change of use. If there are specific details (like the percentage of the year rented, or the amount of the rental income) that are open to interpretation that's one thing - I'm more interested in in the general principles. I have a hard time believing this could catch all those mom-and-pop renters out there, especially with no internet chatter (consider all the info available on capital gains when selling or bequeathing a cottage). But there's nothing obvious on why this _wouldn't_ apply either.


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## NorthernRaven (Aug 4, 2010)

Incidentally, my guess is that there may be something about the definition of a rental property. That CRA guide defines it as _"a building or certain leasehold interests owned by a taxpayer (or taxpayers) or a partnership and *principally* used to generate gross revenue from rent._" (my emphasis). If part-time rentals aren't considered the principal use, then perhaps it remains as personal-use property (albeit generating income) rather than a rental property. But you'd still think there would be chatter out there about the details of testing for this.


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## Four Pillars (Apr 5, 2009)

Good question.

I know nothing about taxes, but I would assume it would work the same as any other type of shared use in that the proportion of capital gain attributed to the "business" would be taxed.

One big problem might be how to calculate the proportion. "A few weeks" could represent most of the viable rental weeks of the year, since most cottages are only rentable in July and August.

Maybe there is some kind of CRA threshold?

I would speculate that most part-time cottage rentals are cash.


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## kcowan (Jul 1, 2010)

ISTR reading about this back when I owned a cottage and the guidance was "as long as the rental income is incidental" then it does not change the use. Sorry, no references.


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## NorthernRaven (Aug 4, 2010)

I found CRA's bulletin IT-120R6 ("Principal residence") which states that "_...a person receiving only incidental rental income from a seasonal residence is not considered to own the property mainly for the purpose of gaining or producing income_." That sounds like the way common sense matches up with the tax rules. Of course, they give no clue as to how one might define "incidental"... 

Their particular situation is a little weird because it is two adjoining cottages, but I feel a lot easier about it now.


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## Plugging Along (Jan 3, 2011)

We had a similar discussion with our accountant a while ago. How she explained it was that if we were really renting it out to help with some of the costs, but pretty much would never turn a profit after deductions (CCA could not be a part of the deductions), then we should report the income, but it would not be a change of use, as we were still using it most of the time. She didn't give an exact time split, but if we were there more than the majority of the time, then we were fine.

It also did not matter when the few weeks that we rented it out for, even if it was prime renting time. They look at the overall year and intent.


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## NorthernRaven (Aug 4, 2010)

Plugging Along said:


> We had a similar discussion with our accountant a while ago. How she explained it was that if we were really renting it out to help with some of the costs, but pretty much would never turn a profit after deductions (CCA could not be a part of the deductions), then we should report the income, but it would not be a change of use, as we were still using it most of the time. She didn't give an exact time split, but if we were there more than the majority of the time, then we were fine.
> 
> It also did not matter when the few weeks that we rented it out for, even if it was prime renting time. They look at the overall year and intent.


Did your accountant indicate whether you could deduct the full year's expenses (insurance, taxes, utilities) or if you had to pro-rate them somehow?


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## I'm Howard (Oct 13, 2010)

We are thinking of Renting our place to skiiers, the property would be available for six months, actual use would be three, but all associated costs for six months are deductible against rental income.

We spoke to a Tax Accountant, and since it is a small loss ot very minor income, He said just forget it, Rev Canada does not bother with this type of issue.

Our major concern is Insurance, without people there over an extended period, claims can be denied.


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## andrewf (Mar 1, 2010)

As I recall, you also need substantially different liability insurance for the property if you operate it as a rental.


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## Plugging Along (Jan 3, 2011)

NorthernRaven said:


> Did your accountant indicate whether you could deduct the full year's expenses (insurance, taxes, utilities) or if you had to pro-rate them somehow?


They have to be prorated.


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## Charlie (May 20, 2011)

I've never seen change in use invoked by CRA for rental income when there's still a significant personal portion and the rentals can be considered 'temporary'. They did crack down on Whistler rentals a while back (cross referencing rental ads to find reported income) so I'd be cautious of just 'forgetting it' unless the gross revenue is very low, infrequent and mainly friends and family. 

Also -- if your mortgage is paid off, you may find that there is indeed income when you prorate expenses. If reviewed, CRA seems to focus on the personal/rental split -- asking for evidence of genuine attempts to rent it out when vacant and in your 'rental' bit of the yr. I've also heard of them disallowing a loss -- deeming the ownership primarily personal -- when financing costs create a loss overall. 

Also the term "principally" used for the definition of rental property typically means greater then 50%. So if you're concerned, possibly keep the 'rental' portion to less than 50%. (same advice to Howard -- if you go 'income' for greater then 50% you may jeopardize principal residence/change in use and other fun stuff). Seasonal rentals are not uncommon. And although they 'may' cause tax problems, it seems they rarely do. If this issue were actively pursued by CRA, you'd see more court cases and a resulting stronger definition of what constitutes change in use for these situations.


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## NorthernRaven (Aug 4, 2010)

So for a seasonal (uninsulated, well-water, unploughed access road) cottage that is opened for no more than 7 months of the year, the prorating would be over that period, not 12 months? So if they rent 2 months, the eligible expenses would be 2/7ths of the yearly insurance and property taxes, not 2/12ths?

Charlie's point about net revenue is a good one. For what I'm looking at, I'd guess they'd only have potential rentals in the high summer July-September. At a hypothetical $700/wk and the unlikely event of fully renting the whole period, that might be $9000, tops. But even assuming you have $1000 each for taxes, insurance and electricity, that's still a lot of other costs and maintenance you'd have to find to deduct if you don't have big mortgage or capital expenses.

The income tax isn't a big worry - they'll do the right thing there. I was just worried that they'd somehow unknowingly cause a capital gains issue, and it sounds like they should be okay. I'll try and convince them to check it out with an accountant.


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## CanadianCapitalist (Mar 31, 2009)

Here is a G&M article on this topic:

The tax pitfalls in earning income from the family retreat



> So, here’s the deal: Any time you change the use of a property from being a non-income property to an income-producing property (earning rents, business income, employment income, etc.), you’ll be deemed to have sold that property at fair market value. And this change in use doesn’t have to be a complete conversion of the property to an income-producing property. It could be a partial change in use – perhaps you’re simply renting out the property for part of the year, renting out just one floor of the


 property, or using a portion of the home for your business or employment.


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## NorthernRaven (Aug 4, 2010)

That was the article I saw first caught my attentions (I linked to it in post #2), indicating that even a partial rental could trigger change of use. Unfortunately, the same columnist in 2007 wrote another article about cottage issues, and said:


> And, the change-in-use rules won't apply if you're only partly renting the place and it still remains a personal-use property.


I emailed him to try and get a clarification, but never heard back. CMF has been _much_ more helpful...


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