Dale Jackson

Personal Finance Columnist, Payback Time

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ANALYSIS: A lot of Canadian investors might be licking their stock market wounds at the cottage this summer.

Here’s something that could bring extra comfort:

Those losses can be used to offset taxes on the sale of that cottage or any other second property.

Any capital losses outside a registered retirement savings plan (RRSP) or tax free savings account (TFSA) can be used to offset capital gains on the stock market going back three years, or forward indefinitely.

According to Myron Knodel, manager of tax and estate planning at Investors Group, those capital gains can also include profit on the sale of a second property.

“Both are considered capital properties, so the losses from the stock market could be offset by the gains from the cottage.”

He cautions that the practice does not apply to capital losses from the sale of a second property.

“If the situation were reversed, in that the gains came from the stock market and the loss came from the cottage, the loss from the cottage could not be offset against any other gains. The reason being that the cottage is considered a personal property and losses are ignored for income tax purposes – only gains are taxed. The theory being that the loss was “enjoyed” by the owner.”

Here’s an example of how it works: Joe bought a cottage for $300,000 when he was young. Over the years he also banked up $50,000 in stock market loses.

Eventually he sells the cottage for $500,000, for a gain of $200,000. Since it is not his principal residence half of that gain is taxable. That means he has to claim $100,000 on his tax return.

The Canada Revenue Agency (CRA) allows 50 percent of those stock market losses to cancel out 50 percent of the gains on the cottage. That means $25,000 can be subtracted from the $100,000 taxable income.

Joe only has to claim $75,000 as income.

Suddenly, the cottage became a bit more relaxing.