GST/HST/PST implications on short term rental contracts of residential properties.
A very important topic on GST/HST/PST was and always will be about how rental income is treated when earned from cottage or vacation property using services such as Airbnb.
For example, the following question is a good example of a potential question that an investor might ask himself: “I purchased a cottage that I plan to rent out for short-term rentals on Airbnb. I am also planning to turn another cottage or a down-town condo I own from personal use to Airbnb rentals.
“What are the GST/HST/PST implications of this?”
Short or long-term rentals? Determining how the property will be used.
It is important to be aware of the primary use of your property when considering the implications of GST/HST/PST that applies to it. The main question is to determine whether the property will be considered for residential purposes (long-term rentals or personal use) or for commercial usage (short-term rentals)?
This would be long-term (leases over 30 days) continuous use of the property. As long as there is no pause in the tenancy then the dwelling can be occupied as a principal residence or a vacation property. Generally, the GST/HST/PST are exempt from these leases and the purchase or sale of the property would also be exempt.
This would include short-term rentals, which are 30 days or less duration. A good example of this would be an Airbnb or a cottage property that would be rented to vacationers or corporate clients.
Transforming your residential vacation property or cottage for commercial use.
There would be no GST/HST/PST implications in the event of transforming your residential property to a commercial property such as for the purpose of turning it into a Airbnb for example. However it would be possible to recover the GST/HST/PST that was paid on the purchase of the property given that the property is new and you are able to claim the rebate. If there was no GST/HST/PST paid for the purchase then it would not be an issue transforming your commercial vacation property to residential or selling it.
However there could be some GST/HST/PST issues in the future to consider if you decide to convert your commercial property to a residential or if you plan to sell it. In this case, there is a deemed sale of the property at current fair market value and the GST/HST/PST would be payable. However a tax rebate may be used if available to offset the some of the GST/HST/PST
Below is a mathematical representation for a property in Canada (we take an average example of 15% of the potential GST/HST/PST applicable):
|Current Fair Market Value * at the date of purchase or at the date of change in use||$485,000
Rent it for short-term rentals for one year.
|Fair market value one year later: $550,000||You start to rent it as a long-term rental (change in use) or you want to sell the property:|
|GST/HST/PST Owing:||$85,500 ($550,000 * 15%)|
You may have a GST/HST/PST rebate available (to you as the owner, at the time of change in use, or to the buyer in case you sell it.) if the property is going to be occupied as a principal residence.
In this example the property appreciated $65,000 over the one-year period, however the GST/HST/PST owed is of $85,500 in GST/HST/PST. Therefore solely on the applicable sales tax alone, there would be a loss of $20,500 on the sale of the property. (This would not take other taxes, or transaction fees, etc into account.)
If you intend to rent your vacation or residential property it would be a wise decision to get some professional advice. If not handled properly, the GST/HST/PST costs can be incredibly significant.