Did you know there are serious GST/HST implications related to short term rentals?

GST/HST on the purchase of rental properties

You’ve likely heard various governments talking about the “housing crisis” and overall supply and affordability, and “cracking down” on AirBnBs and VRBOs. Cities like Halifax, Toronto, Calgary, Edmonton and Vancouver, and others floating the idea of prohibiting short-term rentals on a temporary basis within their local or municipal legal reach; many have already done so.

If you had purchased a new residential condo from a builder or developer for instance, either personally or through a company, you should have paid GST/HST. If you registered for GST/HST purposes after the purchase, you may have claimed a full refund of the tax paid. If you were registered for GST/HST before the purchase, you should not generally have paid GST/HST to the builder, developer or the vendor. 

However, in the latter case, you were required to pay the applicable GST/HST directly to the Canada Revenue Agency (“CRA”) on a GST/HST return and then, in most cases, claim a full or partial offsetting input tax credit (“ITC”), resulting in no net tax payable to CRA. As such, you would not have a GST/HST liability on the property itself as long as it was always used as a short–term rental.

GST/HST when changing from short-term to personal use or long-term rental

If the use of the property changed from being a short-term rental to either personal use, or a long-term rental, a GST/HST liability would be immediately triggered.  Because your GST/HST payable on the new condo purchase, was offset or credited in whole or in part (subject to claiming a new rental property GST/HST rebate, perhaps in error), the GST/HST refund which was claimed as an ITC, will need to be repaid in whole or in part (depending on the amount claimed) as soon as the property ceases to be a short-term rental.

For example, assume you purchased in your own name, a new 2-bedroom condo in Vancouver in 2015 for $500,000 plus $25,000 in GST from a developer and you were counselled to get registered for GST/HST purposes before closing because you were going to rent it out on AirBnB with no personal or long-term rental use. If so, you likely provided the developer with your valid GST/HST registration number, and they did not charge the $25K in GST. 

However, you were obligated to remit the $25K to CRA on your GST/HST return that included the closing date. Assuming there was no personal GST-exempt use of this short-term rental property, you would have generally been able to claim a full ITC of the $25K on your GST/HST return and therefore, no net tax outlay to the developer or the CRA. 

If the city of Vancouver (or the province of British Columbia) were to temporarily ban (see below) most short-term rentals such as AirBnB, VRBO, Expedia, Booking.com, Flipkey, etc., you would be forced to change the unit to a long-term rental. In this case, you must repay the $25K in GST which you previously claimed on your 2015 GST/HST return, at the time when the unit is switched to long-term residential rental.

What can you do now?

Other than protesting your local government officials about not instating such “temporary” bans, you will need to be prepared for this potentially large cash outlay and may need to refinance and perhaps need to charge an above-market rent to compensate for this new addition to your property’s cost of ownership.  At best, you will want to model out with your financial advisor or mortgage broker, what the new cost of borrowing at today’s higher than normal (higher than when you bought the unit) mortgage rates, to see what your monthly rental will need to be and if you will need to somehow subsidize it with personal savings or earnings.

It is not clear to us at this stage, whether such short-term rental bans will assist with the short to medium-term housing affordability and supply issue as it may very well exacerbate the issue with further increases in the monthly rental charges that such residential rental landlords will need to charge. With further immigration plans for refugees of the various global crises, governments will need better multi-pronged approaches.

What else do you need to consider?

With the federal, provincial and local municipal governments’ full-scale assault on the housing supply and affordability crisis, investors, speculators and anyone trying to make a buck, is under increased scrutiny and considerable fines and penalties for “helping cause the housing crisis”.  For instance, you may be impacted (even as a Canadian citizen or permanent resident) by Canada’s new federal Underused Housing Tax (“UHT”). If you’re caught in the rules, you at least have to file a return and claim one or more exemptions from paying the tax.

In British Columbia (“B.C.”), certain owners (mostly non-residents of the province) of residential property may be subject to the provincial Speculation and Vacancy Tax in metro Vancouver, Victoria and Kelowna. Their properties may also be subject to reporting and potential payment of tax in respect of Vancouver’s Empty Homes Tax.  More recently, the province has expanded its assault on short-term rental operators with new rules that have “big teeth” to help local municipalities enforce these bans or limitations.

On October 16, 2023, the government of B.C.’s Housing Minister announced a sweeping set of rules and regulations to greatly crack down on short-term rental operators in the province, in order to provide much needed long-term residential housing to the market (more on that in a future release) subject to a few exceptions and exemptions for motels, hotels, suites in principal residences and short-term suites in certain resort regions.

If your property is in another party of the country, there may be a host of municipal or local sales, lodging or accommodations taxes, levies or surcharges to consider, plus temporary bans or other by-laws and related reporting and compliance, fees, etc. to consider. Long story short, is that governments in Canada (but also in other countries too) are making it very difficult for entrepreneurs to afford to stay in their business with multiple levels of compliance and related fees, etc., but may not actually “make a dent” in the housing crisis issue, particularly given all the other factors at play in Canada and globally. 

Properties held in a bare trust, or title is held by someone other than the beneficial owner of the property (which is common when someone cosigns a mortgage) have to consider the 2023 trust reporting rules New Trust Reporting Rules for 2023 T3 Returns – Achen Henderson.

the climate in canada surrounding short term rentals

A quote from the B.C. Minister of Housing’s press release states that according to 2023 statistics: “there are approximately 28,000 daily active short-term rental listings in B.C.” and “data indicates that more than 16,000 entire homes (emphasis added) are being listed as short-term rentals for the majority of a calendar year”. This suggests that only 16,000 families could be housed in these “entire homes”, assuming they’re even affordable to begin with, if converted to long-term residential rentals. 

The remaining listings are presumably suites or rooms in a home or perhaps a “guest house” or similar lodging unit on someone’s personal residence property, which would generally be exempt under these new rules. Suggesting that these new rules may only return a maximum of 16K entire homes to the rental market and perhaps a portion of the other 12K suites (28K – 16K) to the rental market across B.C.

At Achen Henderson, we can help you to take the complexity out of these various sales and indirect taxes on short-term rental property ownership and operation, plus all your other sales and indirect tax obligations. Call us today for help getting your sales tax collection and reporting right, so that you can rest easy by ensuring your business is not offside with these rules wherever you operate across Canada.  In addition, we now have US state sales and income tax resources to help you with any of your business operations south of the 49^th.