GST/HST and Your Vacation Home

The falling snow is of the champagne variety. Relaxing in your new condo, your feet are up and the wood crackles in the fireplace on the other side of your cozy toes, freed from a long but memorable day in your new ski boots, and your thoughts turn to … GST/HST¹!

Four out of ten Canadians report that they own, or plan to own, some form of vacation property. Many of these properties will be what are termed "vacation rentals." Developers market partial or full ownership in a residential unit, often fully furnished, providing access to resort amenities while affording you the opportunity to offset your costs by enjoying a revenue stream from the property. Your opportunity to use the property is often set at a maximum of two to six weeks per year. For the remainder of the year, the property may be dedicated to a short-term rental pool operated by a professional management company, or may simply be rented on an ad hoc basis by you or an agent.   

The downside to owning that ski condo? Sorting out the GST/HST questions, of course. The rules can be mind-numbingly complex, and the answers often are not what you might expect. 

Paying and recovering the GST/HST on purchase

Normally, it is the responsibility of the vendor of a property to determine if GST/HST applies to the sale. Generally, sales of newly constructed or substantially renovated property are taxable for GST/HST purposes.  Sales of properties used by the vendor for a significant amount of short-term rentals also will frequently be subject to GST/HST, which might surprise those who generally assume used residential property is GST/HST-exempt. As a purchaser, you should take care to establish whether or not the negotiated offer price includes GST/HST. 

Provided your rental activity has a reasonable expectation of profit, you can choose to become a GST/HST registrant with the Canada Revenue Agency (CRA), and claim back all or part of the GST/HST paid on the purchase as an input tax credit (ITC). The proportion of GST/HST that is recoverable is based on the expected proportion of taxable short-term rental use. When that use exceeds 90%, all of the GST/HST can be recovered. However, recovering the GST/HST on the purchase can in some cases affect whether GST/HST will apply when you sell the property, as discussed below.

Corporate purchasers are subject to similar rules, except of course that generally you will have to pay rent, or record a taxable benefit, for personal use. Due to income tax issues, acquiring recreational property through your private corporation is often undesirable if you expect significant personal use. There are taxable benefits from personal use, and the corporation cannot claim the principal residence exemption.
 
Annual vacation rental

Revenue from short-term vacation rentals generally attracts GST/HST. However, "small suppliers" (persons that generate less than $30,000 in GST/HST-taxable revenues annually, together with revenues of "associated persons" such as corporations controlled by them) need not register for GST/HST, although the rental pool arrangements sometimes require them to do so. Property operators will typically charge, collect and submit GST/HST to CRA on room rentals on your behalf. As a GST/HST registrant, you will be entitled to claim ITCs to recover GST/HST paid on operating expenses and capital improvements, based on the percentage the property is used for taxable rentals. You will also be required to file GST/HST returns at least annually.

Sale or change in use

Changes in use of the property of more than 10% can cause an adjustment to the ITC claimed on the purchase and improvements. For example, if Darcy buys a condo as a GST/HST-registrant and pays $10,000 of GST/HST, and he intends to use the condo 60% for rental and 40% for family vacations, he can claim a $6,000 ITC. If his rental use declines to 45%, he is required to repay $1,500 of the original ITC. Alternatively, if the rental use increases from 60% to 70%, Darcy can claim an additional $1,000 refund.

On a resale of the property, you will be required to charge GST/HST in the following circumstances:

1. you have previously claimed an ITC on the purchase of the property or improvements;
2. the property was used more than 50% for taxable rentals or other GST/HST-taxable purposes (and with a reasonable expectation of profit, if the vendor is an individual); or
3. the unit is part of a hotel, resort or similar complex, is not used at least 50% as a place of residence for you or your family, and more than 90% of the property rentals are for periods of less than 60 days.

If the property sale is taxable but you did not previously recover all of the GST/HST paid on the purchase and improvements, the balance of that GST/HST paid may be recoverable as a GST/HST rebate from CRA at the time of sale.

Should I register?

Where the second and third circumstances above do not apply (for example, a new vacation cottage used primarily for personal use and rented only occasionally), and taxable revenues do not exceed $30,000, it may be preferable to avoid registering and claiming an ITC for GST/HST paid on the purchase. This will allow you to sell the property on a GST/HST-exempt basis in the future and avoid the nuisance of filing GST/HST returns and monitoring changes in use.

The calculation of rental and personal use has caused much controversy between taxpayers and the CRA. The CRA has expressed the view that periods of vacancy should not be considered in the calculation of rental versus personal use, even if the property was not available for personal use while vacant. For example, if personal use of a property is six weeks of the year, and rental use is also six weeks, the CRA will take the view that the business use is 50%, even if the property was dedicated to the rental pool, and unavailable for personal use, for the other 40 weeks.

The GST/HST rules for vacation properties with rental use are riddled with traps for the unwary. Income tax issues, beyond the scope of this article, make things even worse. Contact your Collins Barrow advisor if you are planning to buy a vacation property. Make it your advisor's problem, so GST/HST is not on your mind while you warm your feet in front of that fire.

Brian Mitchell is a tax partner in the Canmore/Banff offices of Collins Barrow.

¹ References to GST/HST include the Goods and Services Tax and, in applicable provinces, the Harmonized Sales Tax. Provincial sales or lodging taxes may also apply in some cases to the situations described herein, the details of which are beyond the scope of this article.