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HST and your vacation rental

Added: Jun 18, 2017
Category: For Vacation Home Owners

Owning a Vacation Rental in Ontario is a bit different than in other parts of the world for two main reasons:

1. Since 2010 Ontario has HST on commercial activity and Short Term Rental is considered a commercial activity.

2. Cost of Real Estate in Ontario is some of the highest in Canada, so the potential liability of not understanding HST on Vacation rentals could mean creating a liability that you didn't bargain for!

I will add a third challenge.  Marketing for Vacation Rentals is primarily done through online travel agents (OTAs) such as HomeAway, VRBO, AirBnB, and TripAdvisor. More and more they are pushing for online booking but since the entity you sign up with is an offshore company, they are not registered as a business in Canada and they don't consider the HST implications. This creates a bit of land mine for vacation rentals subject to the HST rules. The OTAs aren't set up to collect HST so a vacation home owner must make adjustments in their pricing to included HST. Then the OTA charges a commission on the HST component, but there isn't a way to collect that HST back when filing an HST return. Making it difficult to calculate what the net HST remittance is and making sure that, to the best of our knowledge, you are accurately reporting revenue and expenses and the HST associated with them.

Long before HST was in Ontario, Revenue Canada produced an information sheet to help understand the Goods and Service Tax and the Harmonized Sales Tax. This was written in 2007 and mainly focusing on condominiums that were special purpose built for short term rentals. However, the tentacles have a long reach and apply to all short term rentals. The Goods and Services Tax (GST) was 5% and so the implications were there but not as great, but in 2011 GST was replaced with HST at a current rate of 13%.

So before you purchase a vacation home, whether it's a home that you will use as a future retirement home, an investment property, a family home / cottage that you want to rent out for stays less than a month, or an existing vacation rental, you should talk with an expert in Sales Tax Law and Accounting.  There are few of these experts as it is highly specialized and really only a concern in a province like Ontario.

Ontario is a great place to own a vacation rental because of its attraction to tourism, from Niagara Falls, wine country in Niagara, biking, hiking, camping, the lure of the outdoors in Muskoka, Haliburton and the Kawartha's, to the history of Kingston or exploring the Great Lakes and the numerous adventures.  Let alone experiencing world class cities like Toronto! This results in great income potential for any vacation rental home owner.

The threshold to register for HST is CAD$30,000 and this bench mark is easily reached with Ontario becoming a 4 season tourist destination.  However, just because you register for HST doesn't mean that the property is automatically designated as commercial.  There are several things that can be done to mitigate the commercial designation, assuming that you want to avoid the commercial designation.  In some financial circumstances this can be to your advantage. That is why it's important to determine you financial goals and these goals should include the full term of ownership, from entering into vacation home ownership to your exit strategy.

Here's a link to an information sheet that you should read and apply to your specific goals:  

Mitigation of the commercial designation may be done by: (Please seek professional advice - I am only reporting based on the experience of the vacation rental owners that we manage and advice we sought from a tax expert).

  1. The vacation home owner pays all expenses as if it were residential.  As an example pay for the lawn care, snow removal, utilities, taxes etc.
  2. Residential use exceeds commercial use (the nights reserved for unpaid stays by the owner, family, friends, maintenance, or for stays longer than outlined in the GI-025-e information bulletin are considered residential).
  3. Any capital improvements are not expensed against the short term rental income (check with your accountant to define a capital improvement vs other expenses)
  4. Professional property management does not designate the property as commercial.  However if you do a long term rental with a property manager and they do the short term rental, the property is the asset generating the income and will be considered commercial for sales tax purposes.

So what does all this mean?  When you go to sell, move in or stop short term rental, this is considered a "change of use" which triggers a deemed sale. This means somebody has to pay Canadian Revenue Agency the HST on the full current market value of the home. So you purchased a property for $300K and now want to retire and move in.  The property value is now $600K, the HST owed is 13% of the $600K = $78 K .

Some common myths to dispel:

  1. Listing on Airbnb exempts from local municipal, provincial and federal rules and regulations. NOT! The house is located in Ontario so all regulations apply, including licensing, insurance, income tax and sales tax.
  2. If I only rent for 2 months in the summer, the property is exempt.  NOT True! Limiting the rentals to two months has ramifications for some tests mentioned above. Seek professional advice before marketing as a one season property.
  3. My short term rental income is less than $30,000 which exempts me from the sales tax rules. NOT True!  You still must comply with all the tests to determine residential vs commercial
  4. I can't register for HST because I don't earn $30,000. NOT True, any level of income can register for HST, its just that under $30,000 is voluntary
  5. The $30,000 is on net rental income after expenses such as property management. NOT True! The $30,000 is gross income, before expenses.
  6. I can't do both short term rental and longer term rental.  NOT True!  Depending on some local municipal regulations and your insurance, you can do a mix.
  7. My primary residence is not in Ontario so I don't have to register.  NOT True!  Non residents of Ontario should seek local tax and account expertise.  Non residents of Canada have some funny rules around short term and longer term rentals.

All of the above is manageable but you want to make sure all your i's are dotted and t's crossed so that you don't have any nasty surprises. We just want you to have your eyes wide open and make sure your due diligence is done. It's worth paying for some expert Tax and Accounting advice at the start, so that you know you can meet your financial goals!

The above should not be constured as legal or accounting advice. Everyone's situation is different and you should seek out your own professional advice before making any decisions.

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