The booming housing market may be a double-edged sword for some Canadians.

Although the principal residence exemption (PRE) will protect many Canadians from capital gains, Jamie Golombek, managing director of tax, estate planning, and wealth advisory services at CIBC, warns that the recent, rapid rise in real estate values could result in significant taxes for those who want to pass their cottages on to the next generation.

In his What’s Up Dock? report, Golombek offers advice on tax efficient ways for Canadians to transfer or sell their second properties. He points out that the PRE can only be applied to one property per taxation year; if someone does not report the capital gain from the sale of a property on his or her tax return, it will be assumed that this was their principal residence for the years they owned it. This would preclude them from using the exemption for another property owned during the years of overlapping ownership.

"You should make a conscious decision whether or not to claim the PRE when you dispose of a property," explains Golombek. "Considering the past appreciation in value and the potential for future increases, it may make sense to save the PRE for the property with the most gains."