The Tax and Accounting Implications of Short Term Rentals

George Dube

George Dube: So, I'll jump right in here. And to me, I'm just going to identify a few points to give some thought to not to say that each of these is going to be relevant. Just some background information here. It's worth giving some thought to in my mind for many people. So, one of the first things here I've got listed is with respect to the type of income that's earned.

And as an individual investing in the properties, it really doesn't make any difference. But now many people want to know, should we have a corporation as an example? And so there's a question of whether that income is earned, what we call active income or alternatively inactive or passive income.

And so typically, particularly as our portfolio is growing, if we can get it to be active income, which is traditionally thought of as buying and selling widgets, if you will, or services. So, in a real estate context, typically it would be buying and selling properties, portions of rent to own. Can we get our property activity on short-term rentals, large enough or active enough to generate a lower corporate tax rate?

So, if we are able to almost always, we're going to have a corporation in place. If it's inactive, we're probably going to want a little bit more size or alternatively we're feeding or investing with our business from another business, or we've got a decent amount of resources available or we expect to, but a decent amount is not an enormous amount.

To acquire in my mind, even a little over it, say $1.5 million over a three to a five-year time period. And I don't mean equity, but property value, most likely we're going to be able to show them how setting up that corporation is going to be used. So, where we get a lot of questions and I have to be the first to admit that I won't pretend to be a GST and HST expert.

We've got a team available that dives in, but I was also chatting with them quickly before the presentation to confirm with them some of the things that we see. So, do we need to be charging GST and HST on short-term rentals? And then in most cases, yes, but not always Revenue Canada or the Department of Finance introduced some new rules, I believe last November.

And then in turn with the last federal budget some of those rules were tweaked if you will. So, where there are Airbnb, other platforms that are being used, check out those rules. Many people have heard of this concept, that if our income is greater than $30,000, we're supposed to be registered for GST and HST.

And again, a variety of exceptions. So, I don't want to say this is universal, but where there's typically speaking of that husband-and-wife team that is investing, is it really 30 each or is it 30 combined? Revenue Canada has different opinions. Based on how the property is zoned. So again, really important to be working, find out in advance from a tax perspective, a legal perspective, what the implications are of changing use here.

A number of people are familiar with some of the gotchas that are involved, where there's a substantial renovation and we have to effectively pay tax on the GST HST, depending on the province we're dealing with on the property. Even if we're using it ourselves, we have to charge ourselves. As we brought a new property, we do have changing use rules where we perhaps started with a long-term rental property or a personal use property.

And now we've converted. But again, those rules are a touch different and without getting into all the details, it's just something to look into, be very careful where a lot of people get into trouble specifically and now in selling the property. Many short-term rentals will require you to charge GST and HST on the property.

And now you're potentially at a disadvantage with other investors or people selling the property. So again, find out beforehand, I'm not saying don't do it. I'm saying let's find out. You also don't want to be in a situation, which we've seen several people get into where it came about. 

The lawyers have identified, Hey, wait a minute. They're supposed to be GST and HST on this purchase and sale documentation has been done incorrectly and you as the vendor may end up eating the GST and HST. So again, be careful what you're doing. There's good ways and bad ways. If the portion of the property is short-term rental, find out the implications on the GST and HST side.

We've had a number of people and I appreciate them going through this really fast, which has had a few minutes here to touch on some points. But I wanted to make sure people were aware of some of the gotchas, if you will. And again, some people are trying to rent long-term to their own corporation and have the corporation rent short-term to others, thinking that they're going to get out of some of those rules and making a long story short.

That's not going to be the case. Similarly, it may impact if we're doing kind of a partial use of our property, or we've been a duplex triplex, our principal residence exemption, which is the portion that we can receive tax free, may be different than what you're expecting. So again, walk in the transactions, knowing what's going on.

Last point here from a tax perspective we can get up to a little bit of good news and there's some more creative ways to believe it or not. While we can do different structuring, we can do different things to help reduce the taxes. It's also possible, similar to investing, in real estate to invest in.

Other people are going to pay your taxes, pay for your legacy. Let's talk about that and see whether some of those opportunities are available for you. And with that, Ryan would certainly be upset if I didn't show the disclaimer, please don't do this at home without some advice. Thank you.

Laurel: Okay, well thank you George.