Short-term rentals have seen a noticeable increase in popularity the last few years. Whether people decide to rent out their homes while on vacation, buy a block of properties to use for AirBnB, or share their cottage on the weekends, the demand for short-term and weekend getaways is ever-present. Plus, there’s often more money to be made than renting those same properties long term. Whether you’re renting your property as a business or as an individual, there are tax implications specific to how your exchanges are structured.
In addition to providing accommodations, property owners are responsible for all listing activities, setting rental prices, and establishing terms and conditions where appropriate. To preface our Q&A, we want to start by saying that property owners need to have a clear understanding of the two types of costs related to short-term rentals as they apply to GST/HST: capital costs and operating costs.
With capital costs, the primary use of the capital asset determines the application of GST/HST. The wrong treatment of GST/HST in this category can cost you a lot of money.
Operating expenses, such as utility costs, cleaning service, etc. must be incurred to carry on a commercial activity. In other words, only the portion of these expenses that relate to short-term rentals can be recovered. The wrong treatment of GST/HST related to operational costs is much less costly than that of capital costs.
In any case, precautions should be taken to ensure GST/HST is applied correctly. We’ve compiled the most commonly asked questions in this area to provide some clarity on what to expect with short-term property rentals.
I want to rent my house occasionally through AirBnB. How does the GST/HST apply?
When someone rents a house or cottage occasionally, they’re considered to be in a commercial activity and must consider whether to collect GST/HST on those rentals. There is a $30K annual threshold for the person and any associated entities. If taxable gross revenue exceeds that threshold, they must register to collect GST/HST. Being registered for the GST/HST facilitates the claiming of ITCs (Input Tax Credits) on operational expenses. These expenses are limited to the use in commercial activity. As the use of the property in commercial activity is occasional, there are no ITCs allowed on capital purchases.
Making claims on capital expenditures under these circumstances can cost tens of thousands of dollars, so it’s important to be mindful of these limits.
I’m moving out of my owned condo into a house. I want to use my condo for AirBnB rentals. What are the GST/HST implications?
The primary use of the condo will change from a personal residence to a property used exclusively in a commercial activity. This will invoke a change in use of the property, which won’t immediately cause any significant impact from a sales tax perspective. But when you either sell the property or change the use back to a residence, GST/HST will be payable on the then-current fair market value of the condo. The same applies if you want to purchase the cottage next door and rent it out on a short-term basis.
All GST/HST paid to carry on the commercial activity is recoverable, both operational and capital.
What are the GST/HST implications for a property where ownership is being split between two couples, acquired with the intent of using it for short-term executive and vacation rentals?
To use a specific example: a used residential property is acquired under the legal name of couple A personally. The intent is to do this purchase in trust for an existing company which is owned personally with couple B. Between the couples, the company is held 50/50. No GST/HST is charged at the time of purchase.
Do they need to assess the GST/HST now and presumably claim an off-setting ITC for the same amount? What would happen if the property was subsequently converted to a long-term rental property?
There are no immediate reporting requirements where a property has a change in use from a GST/HST exempt residential property to a commercial activity (i.e. short-term rentals). No assessment is required.
Once the change in use has occurred, the revenue earned is subject to GST/HST. In the case of personal ownership, if the owner is registered for the GST/HST, tax should start to be collected on all rental income. If the owner is not registered, no GST/HST should be collected on the rent. As mentioned in a previous question, once the owner exceeds $30K in taxable rentals based on gross income, they must register for the GST/HST and start collecting tax. If the ownership is 50% for each person involved, then the threshold becomes $30K per person.
One thing to keep in mind here is when the property is sold, or the use changes to longer-term rentals, there is a requirement to collect GST/HST on the sale or change in use. This applies regardless of whether the initial purchase was exempt of GST/HST.
As well as the GST/HST implications, there may be income tax to consider. We have published an article, Tax considerations for Airbnb hosts which highlights the possible income tax implications.
No matter how you choose to enter into short-term rentals, our team is here to offer guidance and support for any questions you have as they relate to GST/HST or any other considerations.
The information in this publication is current as of July 9, 2019.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
Scott Merry, CPA, CGA
Partner, Indirect Tax
WOW, did not know that the $30,000 annual limit applies to EACH owner if two people (e.g., man and wife) own the property as “partners”. This is our situation exactly. The total rental income is more than $30k, but not more than $60k, meaning we are both exempt from charging HST on the rent. But since it is short-term rentals (one week at a time, for the 10 Summer weeks), do we have to charge HST when we sell of transfer the cottage to our daughter? (Ontario lakefront recreational cottage.)
The answer to your question will depend on the primary use of the property, how many weeks is the cottage available for use in the year? Is the property available for rent at other times of the year but not as popular to rent outside those 10 weeks? There are a number of factors that go into answering the question, will HST be applicable on the sale or transfer of the cottage to your daughter.
Where are these conditions listed? What does it depend on? For example a cottage is personally owned and listed to rent year round but only rents a few weeks and income less than 30,000. No need to register and collect HST but down the road if sold does it now need to sell subject to HST?
The legislation is not generally worded with specific lists of what is applicable – one needs to piece together a number of sections of the Act to come to a conclusion. Interpreting the Act comes down to understanding what the writers of the legislation were trying to capture and putting that together with the actions of the taxpayer. In looking at your example, I would interpret the fact the cottage is listed for rent all year that the intended use of the property was as a rental business and not personal use. The fact it only rented out for a few weeks is only an indication that perhaps it is not in a desirable location or perhaps we were in a pandemic and people were locked down in their house and not able to rent the cottage.
In summary the application of the tax is based on the intended use of the property and the facts supporting that intent.
Interesting. I had no idea about the $30k threshold. Thanks for sharing.
The previous post said:
WOW, did not know that the $30,000 annual limit applies to EACH owner if two people (e.g., man and wife) own the property as “partners”. This is our situation exactly. The total rental income is more than $30k, but not more than $60k, meaning we are both exempt from charging HST on the rent.
Is this accurate? If my wife and I have a business partnership and we make 32000 (16000 each) in revenue from airbnb, do we need to pay HST?
We may need some accounting services as we hit the 30000 threshhold in Feb 2018 and have not yet reported this as business income.
More recently the CRA (Rulings Interpretation) have taken the position that if two individuals own a property as “joint tenants” any revenue derived from the activity is to be accounted for in full by each party and so in your case each individual would use $40,000 as their base for calculating the threshold. My entry in the blog is in relation to a court case a number of years ago where the Federal Court of Appeal ruled two individuals that owned a property as “tenants in common” would calculate their threshold independently.
The CRA’s position has not been tested in court. In my view there are no words in the Excise Tax Act that make a distinction between the two ways of holding property.
We would absolutely be open to discussing how our services can help you.