Thinking of renting your cottage? Here’s what you need to know about the HST!

I’m a fan of shows like Scott MacGillivray’s Vacation House Rules where people trick out their old cottages with amazing renovations so they can rent them out for lots of money through AirBnB. What doesn’t get mentioned, however, are the tax implications of short term rental properties!

First of all, effective July 1 (yesterday) you have to charge HST on all short term cottage rentals (i.e. rented out for less than 30 days).

If you are renting through AirBnB and don’t have an HST registration number, they are required to collect HST on your behalf. BUT, if you do have a registration number, even though AirBnB is collecting the rent for you, you will have to charge your short term tenants the HST yourself on top of what they’ve already paid. That may come as a bit of a shock to them!

Okay, so that’s HST on rents. The more complicated issue is what happens to these income properties when you list them for sale, and whether HST applies on resale.

These are not like regular income properties where all the tenants have long term rental leases. Those are HST exempt leases and the HST does not apply on resale either, because you’re not running a business.

The answer on whether HST applies to your cottage resale, however, depends on whether the property is used for residential purposes (long-term rentals only or for the personal use of the owner or owner’s family) or for commercial use (primarily short-term rentals).

It’s the latter — that commercial use when the primary use is for AirBnB type rentals– that can turn into a real problem, which is something these shows — which focus on the amount of income the owner can generate following renovations — tend to gloss over. Because now you’re running a business, and that means HST may apply to the sale.

If you are using your cottage for mostly AirBnB rentals such that it is primarily being used as an income property, it’s now considered commercial. This applies even if the property is zoned residential — we’re talking about use here, not zoning. And you can run into tax problems if you change that use as well, and decide to just use the property as your own cottage again after renting it out for short term rentals for a few years. That can be considered a “change in use” with a deemed sale at current fair market value and you have to pay HST on the deemed sale.

But let’s say you don’t. You decide to make a killing on short term rentals through AirBnB and then list it for sale. But now it’s a commercial sale, and you have to pay HST on the sale. Ouch!

If the property hasn’t appreciated significantly in value from when you bought it until the time you sell it, you could lose money just on the HST you have to pay. (I don’t know if CRA assesses capital gains before or after they calculate the HST payment, so you really need professional advice on this one.)

I understand that there may be a way around this problem , but like all tax matters, it is complicated and I’m not even sure I fully understand how it works — be sure to talk to your accountant and your lawyer, because I’ve read the CRA guidelines several times now and find them clear as mud.

It looks to me (again, no tax expert) that if you use your cottage yourself more than 50% of the time that it’s open, and for the remaining amount of time, you have a mixture of long term and short term rentals, you should be okay. That’s because when it comes to resale the property has been used primarily for residential, not commercial purposes. However, I’ve read that the long term rentals have to account for 10% of that total.

If your cottage is open seasonally only, that’s going to seriously limit the rents you’re going to get as you can’t charge as much for a 30 day plus rental as you’ll get from short term rentals and that long term rental is going to eat up most of your summer occupancy.

Also be aware that these calculations appear to be predicated on when the cottage is open and available for use, and not when it’s closed up for winter. There will be an entirely different calculation on a winterized cottage that is open for use all year. I actually think a winterized cottage would be more appealing because you can often find families looking for those slightly longer rentals while they wait for new homes to be built. But then you have all the costs associated with maintaining a winterized cottage, like heat, hydro, water, perhaps a heated well line etc.

Long term rentals, of course, can create tenancy rights under the Residential Tenancies Act, so this solution has potential problems as well — you’d want to make sure you’re very familiar with that Act and what you’re doing.

Either way, if you decide to go ahead with short term rentals, be sure to talk to your acccountant to find out if you can deduct expenses like linens, cleaning, etc. from your rental costs and if you can recover the HST paid on these items as ITCs (input tax credits) against the HST you’ve paid on these items.

If you are using the property as a secondary residence with only occasionally short term rentals and/or a mix of long term rentals, you may not have to pay HST on the resale but you will have to pay capital gains on any increase in value.

If it’s being used for primarily short term rentals (like the properties on Scott’s Vacation House Rules, where he usually calculates how much an owner can get in monthly rents), you’ll likely be stuck paying HST when you sell.

Usually, in an offer on a residential property, the HST is included in the sale price, meaning the buyer doesn’t pay it as an extra cost. Sometimes I will see a cottage listing however where the seller says the HST is to be additional to the sale,. This means it is to be paid by the buyer. This tells me the property was used for commercial uses (primarily short term rentals) and the seller wants the buyer to pay the HST on top of the purchase price instead of being on the hook for it themselves, so be aware of that too when you’re looking to buy a cottage.

Don’t just watch TV and get lulled into thinking about all the money you can make by renting out your cottage over the summer. This stuff is complicated! Get expert advice — the taxes consequences can be serious! I had planned to buy a cottage to rent out as I ease into retirement in the next ten years or so, and it’s certainly had me re-thinking whether it’s worth it.