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

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.