Usually yes. Capital gains tax applies when you sell a cottage in Ontario, because the principal residence exemption can only be claimed on one property per family for any given year, and for most families that property is the home they live in. Half of the gain on the cottage gets added to your income in the year of the sale and taxed at your marginal rate.
The exemption itself is not limited to houses in the city. The Canada Revenue Agency accepts a cottage, a cabin, a trailer or even a houseboat as a principal residence, provided you ordinarily inhabited it during the years you owned it. Spending summers there is enough. What you cannot do for any year after 1981 is shelter two properties at the same time. A family unit, meaning you, your spouse or common-law partner and any unmarried minor children, designates one property per calendar year.
That rule turns the question into arithmetic. Suppose your Toronto house gained $600,000 over the twenty years you owned both properties and the cottage gained $400,000 in the same period. Designating the house for all twenty years shelters the bigger gain and leaves the cottage fully exposed. Designations can also be split year by year, which is why families who have held a waterfront property for decades often work the numbers with an accountant well before either place is listed. If the cottage was rented out for part of its life, the rules that apply to selling a rental property come into play too.
The taxable gain is your sale price minus your adjusted cost base and your selling costs. Adjusted cost base means what you paid plus capital improvements such as a new roof, a drilled well or a winterized addition. Ordinary upkeep does not count, so a receipt for a dock rebuild helps you and a receipt for lawn care does not. Commission and legal fees reduce the gain, the same way they reduce the proceeds when you sell a house in Toronto.
One figure worth confirming: the inclusion rate is still fifty percent in 2026. A proposed increase to two thirds was deferred in early 2025 and then cancelled outright in March of that year, so it never took effect.
Report the sale on Schedule 3 and file Form T2091(IND) to record the designation, even in years when the exemption covers the whole gain and no tax is owing.
Related reading: Do You Pay Capital Gains Tax Selling Your Ontario Home?, Do You Pay Capital Gains Tax When You Sell a Rental Property in Ontario?, and How Much Does It Cost to Sell a House in Toronto?
