Jan 2, 2024

Conversions between personal residential and short-term rental use

The use of residential property for providing short-term rentals has become popular with the success of online platforms such as AirBnB and VRBO, so popular in fact that, to help ease a national housing shortage, many Canadian jurisdictions are taking steps to induce or force owners to sell these properties or convert them to long-term rentals.

I recently posted an article which discussed the GST/HST implications of converting to long-term rentals.  This article deals with the implications of conversions between short-term rentals and personal residential use.  The applicable GST/HST rules were designed over 30 years ago, before online platforms existed, to deal with the conversion of larger multi-unit properties.  The rules can produce unexpected results when applied to individual houses or condominium rowhouse units.

Where 90% or more of the rentals are for less than 60 days, a residential building or portion thereof is generally treated for GST purposes as a hotel, and not as a “residential complex” (e.g., a house).

Conversion from personal residential to short-term rental use

There are no GST/HST consequences where an individual converts a property that has been used primarily as a personal residence to being used primarily for short-term rentals.  The deemed supply on the change-in-use[1] is exempt as a used residential complex[2].

Conversion from short-term rental to personal residential use

British Columbia recently passed legislation that will restrict most short-term rentals of residences to properties that are the principal residence of an owner who lives in a portion of it.  Properties in Vancouver, Victoria, Kelowna and many other places will become subject to this rule on May 1, 2024.

To be compliant, some owners may decide to move in and occupy a portion of their short-term rental property.  To illustrate the GST/HST consequences of this, let’s assume that an owner moves into a house in Vancouver worth $1,000,000.  The owner will occupy 30% of the building in an area that is physically separate from the portion that is used for short-term rentals.

When the owner moves in, the 30% portion that she occupies becomes a residential complex[3].  She is deemed to have sold that portion to herself for 30% of the fair market value[4], generating tax payable of $15,000 ($1,000,000 x 30% x 5%).  Since the owner is also deemed to have “substantially renovated” the 30% portion[5], and its value is less than $450,000, the owner is entitled to claim a New Housing Rebate equal to 36% of the tax[6], or $5,400.  The net tax cost is therefore $9,600.  If the house is later sold, the short-term rental portion would be taxable and the residential portion exempt[7].

The result would be different if the owner decided to occupy 60% of the house and leave only 40% for short-term rental.  Since the primary use is now as the owner’s residence, the entire house is considered a residential complex.  The owner must pay tax of $50,000 on the full value of $1,000,000[8] and, since that value exceeds $450,000, there is no New Housing Rebate.  The same result would occur if the owner decided to occupy the entire house.  A resale of the property would be exempt in either case.

Be careful of back-and-forth conversions

The tax consequences of back-and-forth conversions of a residence between owner-occupied use and short-term rental use can be significant.  As an example, let’s assume that the owner of a home in Halifax decides to rent it on AirBnB for two years while she is working overseas.  She moves back in when she returns to Canada and the property is worth $700,000.  With an HST rate of 15%, she has incurred a tax liability of $105,000, which could be more than the net income from the property during the rental period.  If she paid GST on the purchase of the property, that tax would not be recoverable as an input tax credit or rebate[9].  She would have paid GST twice on the same property.

[1] Subsection 208(2) of the Excise Tax Act.

[2] Section 2, Part I, Schedule V to the Excise Tax Act.

[3] The definitions of “residential complex” and “residential unit” in subsection 123(1) of the Excise Tax Act include all or part of a detached house, semi-detached house, rowhouse unit, condominium unit, mobile home, floating home or apartment.

[4] Combination of subsections 190(2) and 207(2) of the Excise Tax Act.

[5] Paragraph 190(1)(d) of the Excise Tax Act.

[6] Subsection 256(2) of the Excise Tax Act.

[7] Subsection 136(2) of the Excise Tax Act.

[8] Combination of subsections 190(2) and 207(1) of the Excise Tax Act.

[9] There is no “basic tax content” because the last acquisition of the property is the exempt supply that was deemed to occur when she moved out.

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