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How to avoid tax surprises when buying or selling a vacation property

How to avoid tax surprises when buying or selling a vacation property

Synopsis
4 Minute Read

Thinking of buying or selling a second home? Avoid unwanted tax surprises by asking some key questions well before you pick up the keys.

Partner, Indirect Tax

Summer is coming and you know what that means — everyone is dreaming about that perfect getaway.

Canada is full of beautiful spots for vacations: both in summer and winter. You may spend months looking for just the right vacation home and suddenly, it appears. Now what?

Buying a second home is a major undertaking and it is important to consider all the tax implications when entering such a significant transaction. What will you do with the property? Will it be exclusively for your family’s use, or do you want to rent it out when you are not using it? What about the other costs of a vacation property? What are the vacation property tax rules in Canada?

All these things should be discussed and reviewed in detail before you sign any documents — never mind pick up the keys. Here are the top questions you can ask to ensure you aren’t blindsided by any unexpected tax surprises when buying a vacation property.

Is tax applicable on your vacation property purchase?

If the property is subject to GST/HST, this could add up to an extra 15 percent to the purchase price, depending on where in Canada the property is located.

Most often, it’s the buyer wondering whether tax on a second property is applicable — they want to know what they need to pay.

However, when it comes to vacation properties, determining tax really depends on who the seller is and what they have done with the property. So, you’re looking at different tax situations depending on if the seller is a corporation, a business partnership, or an individual.

How was the property used?

There are tax rules for a vacation rental property in Canada. When the main use of a property is for short-term rentals, the property will generally be subject to tax when it is sold. This will be the case regardless of whether the person selling the property is even a GST/HST registrant.

But there are some exceptions.

If a vacation property is owned by individuals and has only been used as a vacation property — and not rented out — it will generally not be subject to tax when it is sold.

However, as is so often the case, most properties are used for both rentals and personal use. It can then be very challenging to determine whether tax is applicable when the property is sold. In situations like this, all the facts become very important.

Can you show me an example?

An individual — we’ll call him Mr. Jameson — owns a property at a local ski hill. Mr. Jameson and his family live close by and have used the property during the winter months. In the summer, the property is rented out to students for four months at a time. Mr. Jameson is not registered for GST. Would the sale of this property be taxable?

The answer here is no. Mr. Jameson has not used the property in a commercial activity and would not have to charge tax.

Now, let’s change the example a little bit. Say Mr. Jameson rented the property by the week during the winter and the property was vacant over the summer. This has been the case for the past five years, earning Mr. Jameson between $20,000 – $25,000 each year. His kids have grown up and he now goes south for the winter. Would there be GST on the sale of this rental property?

Yes. This is because the property is being used in a commercial activity. This is the case, even though Mr. Jameson is not registered for GST.

When purchasing a vacation property, people are often ill-advised to register for GST/HST to defer the tax until you sell. Unfortunately, that is not good — or even correct — advice.

What does it really mean if a purchaser provides their GST/HST number?

Provided the purchaser has a valid GST/HST number — and this should be checked — the person selling the property is generally relieved of having to collect the tax.

The purchaser though, by providing their GST/HST number, is effectively saying they are going to use the property for commercial activities. Typically, for a vacation property, this would mean renting it out on a short-term basis (less than 30 days at a time).

If that is the case, the purchaser must report the tax owing and then claim an input tax credit, to the extent available, on their next GST/HST return.

If the purchaser is not using the property for at least 50 percent commercial activities, they need to remit the tax on a special return by the end of the month following the purchase.

Whether a purchaser should register for GST/HST depends on what they want to do with the property. If the main use of the property is expected to be personal use, then the purchaser should not register for GST/HST. It is better to pay the tax upfront and be done with it.

Sometimes the use of a vacation property can change over time, as we saw in the examples of Mr. Jameson. If GST/HST was paid on the purchase, it doesn’t mean it may not be applicable again when the property is later sold. The tax implication depends on the use.

How is the property owned?

Property ownership also impacts the tax treatment. Sometimes these types of properties are purchased in a corporation. If that company is already registered for GST/HST, their GST/HST number is required to be provided upon closing.

If the seller is a corporation, then it may be that the property was rented out. The question then becomes: was it used for long-term rentals or rented on a short-term basis?

It’s the seller of the property who is responsible for collecting the correct amount of tax. However, often they do not realize they are on the hook, and they put very vague wording in the agreement. Look out for phrases like “the GST/HST is included in the price” or “if applicable.”

What are the tax implications of buying a furnished house?

Another item that should be considered when you’re buying a vacation property is whether it’s furnished.

Often vacation properties are sold with all the contents. If you happen to live in British Columbia — or any other PST province — then PST will need to be self-assessed on the value of the furniture. It’s helpful to agree to a value in the negotiations, otherwise the respective ministry determines this for you. 

Do provinces outline any rules regarding the use of the property?

Some provinces, including British Columbia, have introduced restrictions on where properties can be used for short-term rentals. Make sure you review the regulations for the area before you purchase to ensure you’ll be able to use the property the way you choose to.

Additionally, make sure you’re aware of other measures that may be applicable to a second or underused home — like the federal underused housing tax and/or BC’s speculation tax.

Don’t leave your vacation property purchase to chance

Buying a vacation property is very exciting. However, it’s important to understand all the tax implications before you purchase. To learn more, contact Heather Weber. 

Heather Weber CPA, CGA

Partner, Indirect Tax

250-979-2575

1-877-766-9735

[email protected]

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