A Toronto owner who buys a cottage in Muskoka needs approval from a lender, a tax position the Canada Revenue Agency will accept, and, if the cottage will be rented, a licence from the township. Each of these treats a second property differently from a principal home, and each applies at a different stage of the purchase. Prices are lower than they were 4 years ago, with the median waterfront price in Muskoka at about $950,000 in May 2026, roughly 23% below the 2022 peak of $1.235 million.
Muskoka Cottage Supply in 2026
Waterfront inventory in Muskoka reached 17.5 months of supply in May 2026, about 2.4 times the 10-year average of roughly 7.4 months. Sales in May fell to 44 from 67 a year earlier, a drop of 34%. The full-year 2025 total of 561 waterfront sales was 20% below the 10-year average of about 699, and one regional forecast projects 2026 sales about 10% lower again.
The decline is steepest at the top of the market. Across Ontario’s cottage regions, May sales above $1 million fell 22% from a year earlier, and sales above $3 million fell from 30 to 16. Sales under $1 million rose 13% over the same comparison.
Conditional offers are easier to negotiate with supply at that level. A septic inspection and a water test are standard requests on a cottage, and a seller with this many competing listings has little basis to refuse them.
Other cottage regions within driving distance of Toronto have fallen by similar amounts. Prices in the Haliburton and Kawartha region are estimated at about 24% below their 2022 peak, and Parry Sound at about 27%, while Parry Sound’s May sales rose 8% from a year earlier to 39. A buyer comparing regions is choosing among markets that are all well below the same 2022 high point.
Toronto Equity After the Price Decline
A Toronto owner who funds a cottage with equity from the city property is borrowing against a lower value than a year ago. Across the Greater Toronto Area, the composite benchmark price fell 4.7% from September 2025 to September 2026, and the average selling price fell to $1,006,409 from $1,060,036. Sales dropped 9% to 5,040, and within the City of Toronto there were 1,937 sales, down 5.4% from September 2025.
Buyers looking at homes for sale in Toronto and the surrounding region had fewer new options in September, with new listings down 14.4% from a year earlier to 16,500. Fewer new listings alongside fewer sales mean many owners are holding their properties through the slowdown.
Federally regulated lenders cap a home equity line of credit at 65% of a property’s value. A 4.7% decline in the benchmark lowers that 65% limit on a Toronto house by the same 4.7%.
Down Payments and Borrowing Costs
The minimum down payment on an insured purchase is 5% of the first $500,000 and 10% of the portion between $500,000 and $1.5 million. A property priced at $1.5 million or more needs 20% down. Those tiers took effect on December 15, 2024. A cottage that will be rented out for the full year generally needs at least 20% down, and lenders differ on insured financing for a vacation property. The occupancy plan decides which lenders and which down payment tiers are open to the owner.
The Bank of Canada held its key rate at 2.25% on September 2, 2026, its seventh consecutive decision without a change. Headline inflation was about 3%, mostly because of fuel prices, and Desjardins expects a 50-basis-point increase in the first half of 2027. The next decision is scheduled for October 28, 2026.
Land Transfer Tax on the Cottage
Ontario’s land transfer tax on a property with 1 or 2 single-family residences is 0.5% on the first $55,000, 1% up to $250,000, 1.5% up to $400,000, 2% up to $2 million and 2.5% above that. On a cottage at the May median price, the provincial tax is $15,475. Toronto charges a municipal land transfer tax on top of the provincial amount for purchases inside the city, and a Muskoka purchase is outside that boundary, so the owner pays the provincial tax alone on the cottage.
Toronto’s municipal brackets match the provincial ones up to $3 million, so a buyer inside the city pays the tax twice on the same price. In December 2025, city council approved a luxury land transfer tax increase on purchases above $3 million, with a municipal rate of 4.4% for a house worth $3 million to $4 million that rises on a scale to 8.6% above $20 million.
Principal Residence Designation
Only 1 property per family unit can be designated as a principal residence for a given year after 1981. The family unit includes the owner, a spouse or common-law partner, and unmarried children under 18. A cottage can qualify even if it is used only in summer, since the property has to be ordinarily inhabited during the year and occupancy does not have to be year-round. The land counted with it is generally limited to 0.5 hectares unless more is needed for the use of the home.
With both properties owned, the owner chooses which one to designate for each year, and the gain on the other property for those years is taxable. A plus-one year in the exemption formula lets a family unit own 2 properties at once for up to 1 year and still shelter both, which matters when the cottage purchase and a later sale of the city house overlap. On March 21, 2025, the federal government cancelled the planned increase to the capital gains inclusion rate, which would have raised the taxable share of an individual’s gains above $250,000 a year from 50% to about 67%. The rate remains 50%. A Toronto house and a Muskoka cottage that have gained value at different rates can produce very different tax bills depending on which one is designated.
Rental Licences in Muskoka Lakes
In the Township of Muskoka Lakes, a cottage rented out on a short-term basis needs a licence that is renewed every year, regardless of how long the owner has operated it. The township opened its online application portal on July 28, 2025, and the first licences issued under the bylaw run to November 1, 2026. Existing operators were required to apply by December 31, 2025, and those who applied before September 30, 2025 received a 20% discount on licence fees.
Other Muskoka municipalities set their own rules for rentals. Rental income belongs in a carrying-cost budget only after the specific township’s bylaw has been read and a licence is in hand.
Costs of Getting the Order Wrong
The occupancy plan has the largest cash effect of any decision in the purchase. On a $950,000 cottage, the minimum insured down payment is $70,000, while a cottage planned as a full-year rental needs 20%, or $190,000. An owner who signs a purchase agreement with the lower figure in mind and a rental plan in the background can be asked for the other $120,000 at closing.
