How to Avoid Tax Surprises When Buying or Selling a Vacation Property

Summer is coming and everyone is already dreaming about that perfect getaway. Canada is full of beautiful spots for vacations; summer or winter. You may have spent months looking for just the right vacation home and suddenly, it appears. What now?

Buying a second home is a major undertaking and it is important to consider all of the tax implications when entering into such a significant transaction. What will you do with the property? Will it be exclusively for your family’s use or do you want to rent it out when you are not using it? What about the other costs of a vacation property?

All of these things should be discussed and reviewed in detail before you sign any documents, never mind pick up the keys. Here are the top questions you should be asking to ensure you aren’t left with any unexpected tax surprises when buying a vacation property.

Is tax applicable on your vacation property purchase?

If the property is subject to GST/HST, this could add up to an extra 15% to the purchase price, depending on where in Canada the property is located.

Often, it’s the buyer that’s wondering whether tax is applicable – they want to know what they need to pay. However when it comes to vacation properties, determining tax really depends on who the seller is and what they have done with the property. If the seller is a corporation, a business partnership or an individual, for example, you’re looking at different tax situations.

How was the property used?

When a property has been rented out on a short-term basis as its main use, the property will generally be subject to tax when it is sold. This will be the case regardless of whether the person selling the property is even a GST registrant. There are however, some exceptions.

Where a vacation property has just been used as a vacation property and not rented out AND owned by individuals, it will generally not be subject to tax when it is sold.

However as is so often the case, most properties are used for both rentals and for personal use. It can then be very challenging to determine whether tax is applicable when the property is sold. In situations like this, all the facts become very important.

An example

An individual – we’ll call them 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.

Let us 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. Mr. Jameson earns between $20,000 - $25,000 each year. His kids have grown up and he now goes south for the winter. Would the property be taxable when it is sold? 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 advised to “just register for GST and then you will be able to defer the tax until you sell it.” Unfortunately that is not good or even correct advice.

What does it really mean if a purchaser provides their GST number?

The person selling the property is generally relieved of having to collect the tax (provided the purchaser has a valid GST number – this should always be checked).

The purchaser though, by providing their GST number, is effectively saying they are going to use the property in commercial activities – generally with 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 has to report both the tax owing and then claim an input tax credit (to the extent available) on their next GST return.

If the purchaser is not using the property for at least 50% 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 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. It is better to just pay the tax upfront and be done with it.

Sometimes what happens with vacation properties is the use changes over time, as we saw in my Mr. Jameson examples. Just because GST was paid on the purchase, does not 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?

How a property is owned also greatly impacts the tax treatment. Sometimes these types of properties are purchased in a corporation. If that company is already registered for GST, their GST number should be provided on closing to avoid paying tax.

If the seller is a corporation, then it’s likely the property was rented out. The question then becomes, was it used for long-term rentals or rented on a short-term basis (less than 30 days at a time)? The seller of the property is the party 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, such as ‘the GST is included in the price’ or ‘if applicable’.

Is it furnished?

Another item that should be considered when you’re buying a vacation property is whether or not it is furnished. Often vacation properties are sold with all of the contents. If you happen to live in beautiful British Columbia (or any other PST province) then PST will need to be self-assessed on the value of the furniture. It is helpful to agree to a value in the negotiations so the Ministry does not have to determine this for you.

Buying a vacation property is very exciting, however it is important to understand all of the tax implications before you purchase. To learn more, contact Heather Weber, CPA, CGA, at 250.979.2575