Brianne and Doug Hamilton say having to pay 13 per cent HST when putting their Canadian short-term rental properties up for sale is one of the reasons they diversified their property business south of the border, where they say it’s less expensive to operate as a small business owner.
The couple are owners of Junction House Property Management, where they own and operate a number of short-term rentals and vacation properties in Toronto and Muskoka, elsewhere in Canada, as well as in the U.S.
“With all of the taxes coming down on small business owners, it doesn’t make sense to keep investing here (in Canada),” Brianne said.
While the Hamiltons say they always knew they had to pay HST when they sell, other owners have been caught off guard by a recent tax ruling that has raised awareness of the fact short-term rental hosts have to pay HST when they sell, or in some circumstances, when they decide to convert their short-term rental into long-term accommodation.
The ruling by the Tax Court of Canada indicates homeowners who have regularly rented out their property on Airbnb or other short-term rental sites will be subject to paying 13 per cent HST when putting the home up for sale. The 13 per cent tax is applied to the total price paid for the property when sold, so could amount to tens — or even hundreds — of thousands of dollars.
While the sale of a previously occupied residential property is generally exempt from HST, the Tax Court of Canada ruled in March that the sale of a condo unit rented out on Airbnb for a number of short-term leases was subject to the tax. The homeowner originally used the Ottawa-based condo for long-term rentals, but because they converted it to a short-term rental it was not exempt from the sales tax, as it was operating as a commercial business by the time of sale. Long-term rentals do not operate as a commercial business, the ruling noted.
Before people decide to venture into short-term rental ownership they should speak with their accountant and lawyers to ensure they understand the various tax implications of operating a short-term rental such as the capital gains tax, Municipal Accommodation Tax and 13 per cent HST, said Christian Szpilfogel, chief investment officer of Aliferous Group, a private investment firm.
“People aren’t fully aware of the laws that apply to them,” said Szpilfogel. “People tend to be very busy with their lives, and are not always getting the right guidance when dealing with major purchases like this with potential tax implications and can get caught by not following or understanding the rules of owning a commercial business.”
It’s important for homeowners to know there’s a 90 per cent threshold of renting out the property, which determines if they’ll be subject to HST upon sale, said Dale Barrett, president and founder of Barrett Tax Law. While that 90 per cent threshold doesn’t have a clear definition, it could mean that if the property is rented out for short-term use 89 times but rented out 11 times for long-term use then the property wouldn’t be subject to the tax, Barrett said.
However, the change in use of the property is particularly important to note, as that can dictate when the HST is paid if the short-term rental owners claimed input tax credits, he said.
GST/HST registrants may recover the GST/HST paid or owed on purchases and expenses related to their business by claiming the input tax credits, which can be claimed for improvements to capital property, advertising expenses, and accounting fees. It’s a helpful tax credit for short-term rental owners and helps offset the HST, Barrett said. But if the tax credit is used, the government can make you pay the HST when deciding to convert the use of the property from short to long-term rental, instead of when you decide to sell the property, he added.
“The change in use is taxable,” he said. “If you didn’t claim input tax credit it may not be a requirement to pay HST at the time the change in use occurs.”
But it’s not a “one-size-fits-all advice,” Barrett said, which is why consulting a lawyer and tax expert is vital every step of the way.
Frank Andrée, a short-term rental owner based in Ottawa, said this particular caveat is something people may not be aware of.
“A lot of people use the input tax credits, so paying HST when you decide to convert the use dis-incentivizes people to change their short-term rental into long-term accommodation.”
For the Hamiltons, the stringent short-term rental regulations in Toronto is another reason the majority of short-term rental owners they know are “hesitant” to keep investing in Airbnb, VRBO and other short-term rental businesses in Toronto.
They understand the importance of paying the HST tax upon sale or the Municipal Accommodation Tax (MAT), but say that the City of Toronto offers little support in terms of boosting small business accommodations on tourism sites, unlike Muskoka where the region actively works to “promote you,” Brianne added.
That’s why the couple has ventured more to the U.S. where they feel there’s greater incentive for real estate investors to “reinvest in the market” and “help build the economy.”
“That’s not what’s happening here,” Doug said.
