How is cottage rental income reported?
Rental income and expenses are reported on Form T776, Statement of Real Estate Rentals, filed with your annual tax return. Eligible current expenses, meaning costs that keep the property running rather than improve it, are netted against gross rental income; these typically include property tax, insurance, mortgage interest (not principal), utilities you pay as landlord, repairs and maintenance, management fees, and advertising. Capital expenditures, such as a new roof, a major renovation, or replacing a septic system, are not deducted as current expenses; instead they are added to the property's capital cost and recovered gradually through capital cost allowance.
How do I split expenses between rental and personal use?
Most cottages used for the audience this guide is written for are rented only part of the year, with the owner also using the property personally. Every deductible expense line, and any CCA claim, must be prorated to reflect that split, most commonly by the ratio of rental days to total days used: deductible expense = total expense × (rental days ÷ total days used). Where only part of the property is ever rented, such as a single guest suite, a reasonable method that accounts for both the space rented and the time it was rented can apply instead of a pure day-count. Keeping a simple log of which days the cottage was rented, personally used, or vacant, alongside dated receipts for every expense, is the practical foundation this calculation depends on, and it is exactly the kind of record that is easy to keep in the moment and painful to reconstruct at tax time.
A cottage rented only occasionally, without a reasonable expectation of profit, may not be treated by the CRA as a genuine rental business at all, in which case its losses could be denied even though some income is reported. This determination depends on facts specific to each situation, including pricing, advertising effort, and how consistently the property is actually rented.
What is capital cost allowance and how does it work on a cottage?
Capital cost allowance (CCA) lets you deduct a portion of the building's capital cost each year, recognizing that a building wears out over time; land itself is never depreciable. A cottage building generally falls into CCA Class 1, with a maximum annual rate of 4% on a declining balance. In the year the property (or a capital addition to it) is acquired, the half-year rule limits the claim to half the otherwise-allowable amount, effectively 2% of the addition in year one.
CCA year 1 = building capital cost × 4% × 50% (half-year rule)
CCA year n (n > 1) = opening undepreciated capital cost × 4%
A hard limit applies regardless of the calculation above: CCA cannot be used to create or increase a rental loss. The CRA restricts the CCA claim in any year to the amount that brings net rental income down to exactly zero, not below. This means CCA is only useful once the property is already profitable before depreciation; it cannot turn a loss year into a larger loss.
Why can claiming CCA cost you the principal residence exemption?
Every dollar of CCA claimed reduces the property's undepreciated capital cost (UCC). On an eventual sale, if the proceeds allocated to the building exceed the remaining UCC, the difference, up to the total CCA previously claimed, is "recaptured" and taxed as fully taxable ordinary income in the year of sale, separately from any capital gain on the excess of proceeds over the original cost. In effect, CCA is not free money: it defers tax now in exchange for a larger, differently-taxed bill later.
There is a second, often more consequential cost. Claiming CCA on a property with any personal-use component is a higher-scrutiny position from the CRA's administrative standpoint, and it can complicate access to the principal residence exemption for the years the property was used personally. A common practical approach, discussed with a tax professional rather than assumed, is to forgo the CCA deduction on a cottage that still has meaningful personal use, precisely to keep the principal residence exemption fully available and to avoid the recapture calculation on sale. This is a real trade-off between smaller deductions now and a cleaner, and potentially larger, tax-free position when the cottage is eventually sold.
What extra rules apply to short-term rentals?
A federal Income Tax Act provision, in force for expenses incurred after 2023, denies the deduction of expenses used to earn income from a short-term rental, defined as a residential property rented for a period of less than 90 consecutive days, for any period the rental was prohibited by, or did not comply with, the applicable provincial or municipal law, such as a required registration, licence, or permit. The denied amount is calculated by prorating the otherwise-deductible expense by the number of non-compliant days over the number of days the property operated as a short-term rental, so only the non-compliant portion of the period loses its deductions rather than the whole year automatically. Before advertising a cottage as a short-term rental, it is worth confirming directly with the municipality and province whether short-term rentals are permitted at that address at all, and whether a licence or registration is required, since the tax consequence of skipping that step now falls on the federal return as well as any local penalty.
Do I need to charge GST or HST on a short-term rental?
Renting a residential property for continuous periods of less than one month is treated by the CRA as a commercial activity for GST/HST purposes, distinct from longer-term residential rentals, which are generally exempt. Once your total worldwide taxable revenue from this kind of short-term supply exceeds $30,000 over four consecutive calendar quarters, you are generally required to register for a GST/HST account and to charge GST/HST on your bookings at the rate applicable in the province where the cottage sits. Below that threshold you can typically remain a small supplier and are not required to register, though voluntary registration is possible. This is an area with enough situational nuance, including how far the $30,000 threshold reaches if you have other commercial activities, and how a change from short-term to longer-term rental use is treated for GST/HST purposes, that it is worth confirming your specific position with the CRA or an accountant rather than assuming either way.
Are there provincial or municipal vacancy taxes to worry about?
Separately from income tax, some provinces and cities charge an annual tax on residential property that sits vacant, which can apply to a cottage that is neither occupied by the owner nor rented for enough of the year, depending on the jurisdiction's specific exemptions. The federal Underused Housing Tax has been eliminated going forward: per Budget 2025 and the legislation that followed, no return needs to be filed and no tax is payable for the 2025 calendar year or later, though obligations for 2022 through 2024 remain enforceable. Provincial and municipal vacancy taxes are separate and continue to apply where they exist, including British Columbia's Speculation and Vacancy Tax in specified regions, Vancouver's Empty Homes Tax, Toronto's Vacant Home Tax, and Ottawa's Vacant Unit Tax, each with its own rate, occupancy threshold, and required annual declaration. None of these should be assumed to apply, or not to apply, to a specific cottage without checking the exact taxing jurisdiction and its occupancy exemptions, since a genuinely seasonal cottage in one of these areas can be caught by rules originally aimed at empty urban housing.
Work out your own numbers
- Cottage running costs calculatorSee your full annual carrying cost before splitting it between rental and personal use.
- Principal residence exemption calculatorSee how a change of use or a CCA claim can affect your exemption.
- Family property cost splitIf multiple family members share the cottage, split rental income and costs fairly.
Common questions
Can I deduct mortgage interest on a rented cottage?
Yes, the interest portion of mortgage payments on a cottage is a deductible current expense, prorated by the rental-use share, just like property tax and insurance. Mortgage principal repayment itself is never deductible.
Does renting my cottage occasionally automatically make it a rental property for tax purposes?
Not automatically. Occasional rental to help defray costs, without a genuine profit motive or consistent rental activity, may not meet the CRA's test for a rental business, which affects whether losses can be claimed. Income earned is still reportable regardless of how the activity is characterized.
If I stop renting my cottage and use it only personally again, is there a tax event?
Potentially, yes. A change from rental to personal use is a change of use for tax purposes and is generally treated as a deemed disposition and reacquisition at fair market value on the date of the change, which can trigger a capital gain even though nothing was sold. An election can sometimes defer this; see the change-of-use discussion in our capital gains guide before assuming either outcome.
Sources
- LendCity, Capital cost allowance guide (Class 1 rate and half-year rule), checked 15 September 2026.
- Real Estate Tax Tips, Claiming CCA on rental properties (loss restriction and recapture), checked 15 September 2026.
- Bennett Jones, Income Tax Act short-term rental expense denial rules, checked 15 September 2026.
- BorderBird, GST/HST on Canadian rental income, exempt vs taxable, checked 15 September 2026.
- McMillan LLP, Budget 2025: Underused Housing Tax eliminated, checked 15 September 2026.
- City of Toronto, Vacant Home Tax, checked 15 September 2026.
- City of Ottawa, Vacant Unit Tax, checked 15 September 2026.
Last reviewed 15 September 2026. Next review March 2027. Written by the OwnersLog team from the official sources listed above. No professional reviewer is named on this page yet.
This guide is general information about how the rules work, not financial, tax, legal or mortgage advice, and it cannot account for your circumstances. Confirm anything that matters with a qualified professional. See the full disclaimer.