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If there are not many cottages on the market in your favoured area, or if you are a keen do-it-yourself fanatic, you may want to consider purchasing land, and putting up your own building on it. There are two basic choices available; custom build your cottage (with all the attendant headaches of hiring an architect and contractor), or buy a pre-fabricated home. There are a number of pre-fabricated home builders in Ontario, offering a large selection of models. Three that spring to mind are Royal Homes, Pan-abode and Viceroy, but an internet search will identify many others.
In all cases, prefabricated homes need to have a foundation built on which to place the building (which may or may not include a full or partial basement), the cost of which will need to be factored into your overall financial outlay, and which may be over and above the package price offered by the seller. Naturally, when undertaking to build your own cottage, you must obtain all necessary work permits from the local authority, and follow all building codes.
When you finally make the decision to buy, the process you follow will be substantially the same as when buying your own home, and will involve real estate agents and lawyers. Most people buying cottages (though not all) will have already gone through this process with their home, so I will not cover this in any further detail.
Why am I talking about this in a web page that deals with purchasing a cottage? The reason is that when you buy a cottage (and you already own a home), it truly is an investment. You will discover this in no uncertain terms when you come to sell or otherwise dispose of it. Any increase in the value of the cottage between the time you bought it and the time you sell is treated as a capital gain, and (at the time of writing) half of it is taxable at your marginal tax rate. What does “marginal” mean? This is the tax rate that applies to the highest tax bracket into which your net income falls, as defined by the Canada Revenue Agency.
In order to minimize the capital gain, you should keep track of the costs of any capital improvements you make to the cottage, such as wood sheds, bunk houses or extensions to the cottage itself. These costs can be deducted from the capital gain, which will ultimately reduce the tax bite. Note that maintenance expenses do not qualify as capital improvements, so that if you replace the shingles on the roof, for example, this will not count. Consult the Canada Revenue Agency web site for more details on capital expenditures, or talk to your accountant or tax lawyer.
If you are leaving the cottage to your children, at the time of death you are deemed to have disposed of the cottage, and capital gains tax will be payable by your estate. This can be a serious headache for your heirs, as they may find themselves being forced to sell the cottage in order to pay the taxes. There are a number of strategies to help alleviate the problem, however. One involves insuring your life for the potential amount of tax payable. Another (possibly more expensive) option is to set up a family trust, and transfer ownership of the cottage to it. I am no expert on these matters, and you should consult a lawyer to determine the best options for you.
Hopefully, the pointers given above will help you to find the cottage of your dreams while avoiding some of the pitfalls. For pointers on maintenance and other aspects of owning a cottage, you may refer to other pages on this web site.