As we head into vacation season, we often get questions related to GST/HST on cottage or vacation property rentals using services such as Airbnb. For example: “I purchased a cottage that is closing on June 1st. I plan to rent this out for short-term rentals on Airbnb. I am also planning to turn another cottage I own from personal use to Airbnb rentals. What are the GST/HST implications of this?”
How the cottage or vacation property will be used – short- or long-term rentals
When considering how GST/HST applies to a vacation property, you must be aware of the primary use of the property. Is this a residential property (longer-term rentals or personal use) or a commercial property (shorter-term rentals)?
- Residential property – this would be longer-term continuous use of the property. It can be occupied as a principal residence or a vacation property but without pause in the tenancy. Generally these leases are exempt of GST/HST and the purchase or sale of the property would be exempt of GST/HST.
- Commercial property – this would include shorter-term rentals, less than 30 days in length. For example, a cottage property where you are renting it out under-30 day stays, through services such as Airbnb.
Changing a cottage or vacation property from residential to commercial: GST/HST
Where a property changes from a residential property to a commercial property, such as your purchase of the cottage to turn it into an Airbnb rental, there are no GST/HST implications other than allowing for GST/HST paid on the purchase of the property to be recovered. Given you did not pay GST/HST, this is not an issue.
Changing a cottage or vacation property from commercial to residential or selling: GST/HST
Where the problem arises is in the future, when you either change the use of the property from commercial to residential or sell the property. Where you change the use of the property there is a deemed sale of the property at current fair market value and GST/HST is payable. A rebate may be available to offset some of the GST/HST.
Below is a mathematical representation for a property purchased in Ontario:
Rent it for short-term rentals for one year.
|FMV one year from now||$550,000
You start to rent it as a long-term rental
|HST Owing||$71,500 ($550,000 * 13%)|
In Ontario, a rebate may be available if the property is going to be occupied as a principal residence.
In this example a purchaser in Ontario would have made $65,000 on the appreciation of the property, but owed $71,500 in GST/HST. On GST/HST alone, the property would be sold at a loss of $6,500. (This does not take into account other taxes, transaction fees, and so on.)
For vacation properties situated in provinces west of Ontario the tax owing would not be as significant.
Get advice on your cottage or vacation property rental
For vacation properties, whether purchasing, changing their use, or selling, please ensure that you seek out the proper advice from a GST/HST expert. The GST/HST costs can be incredibly significant if not handled properly. If you have further questions on the GST/HST implications for your cottage or vacation property, please contact Scott Merry at firstname.lastname@example.org.
Scott Merry, CPA, CGA
Partner, Indirect Tax
Tags: commercial, cottage, residential, vacation property