Nov 26, 2023

"Cracking down" on short-term rentals has GST/HST Consequences

The federal and some provincial and municipal governments are making concerted efforts to reduce the use of homes for short-term rentals, which are often marketed through online platforms such as AirBnB and VRBO. One of the reasons cited has been to encourage the reversion of these properties to the long-term rental market to help alleviate Canada’s housing shortage.  Such a reversion has GST/HST consequences.

Hotel-type properties

Most residential properties that are rented exclusively for periods of less than 60 days are treated as hotels for GST/HST purposes.  A registered owner collects and remits tax on the rentals and is entitled to claim input tax credits for taxable purchases, including the purchase of the property itself.  The sale of such a “hotel-type property” is taxable.

Deemed substantial renovation

The conversion of a residential property from exclusively short-term rentals to exclusively long-term rentals (for one month or more) is deemed to be a “substantial renovation” for GST/HST purposes.  In plain English, this conversion is treated as if the building had been newly constructed.  The owner is required to self-assess and remit tax on the fair market value of the property at the time the property is first rented on a long-term basis.  If the property qualifies (which many will not due to their value), the owner may claim a New Residential Rental Property Rebate to offset up to 36% of the tax payable.  The subsequent long-term rentals are then exempt.  Input tax credits are not available.

This is a rather punitive consequence for someone who purchased a property for short-term rental purposes in compliance with the laws that existed at the time and has no desire to sell the property or rent it to tenants.  However, it pales in comparison to the federal government’s proposal in its recent Fall Economic Statement to deny the deductibility of expenses for income tax in jurisdictions where the short-term rental of homes has been prohibited, or where owners are not in compliance with restrictions.  That is nothing short of confiscation. The use of phrases such as "cracking down" reeks of a government desperate to blame someone else for its failure to make housing (and other life necessities) available and affordable for Canadians.

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