Airbnb & GST
Written by Krystin Kempton, Associate.
Airbnb is a website connecting people searching for short term accommodation with homeowners wishing to rent their homes or spare rooms. An increasingly popular alternative to hotels, Airbnb may bode well for many of us living in here paradise, as vacationers come to town for ski vacations in the winter and cottage life in the summer. Short term rentals—that is, rentals for less than 30 consecutive days—can lead to some extra pocket cash. However, that extra pocket cash leads to taxes.
First of all, rental income is added to regular income and is taxed at the same rate. It is in the homeowner’s best interest to put aside reserves to avoid unwelcome surprises when income taxes are due. Homeowners also need to be aware of goods and services tax (“GST”) implications. If rental income exceeds $30,000 in one year, the homeowner must register with Canada Customs and Revenue Agency. As a GST registrant, the homeowner is obligated to charge and remit GST and file returns. The homeowner may recover GST paid on operating expenses and capital improvements by claiming input tax credits (“ITCs”), based on the extent to which the property is used for taxable rentals.
If a homeowner uses his or her property for short term rentals and wishes to sell the property, it is important to determine whether GST will apply to the purchase of the property. GST is payable if:
– the seller has claimed ITCs for GST on the purchase of the property or improvements on the property;
– the property is used less than 50% of the time as the seller’s place of residence and all or substantially all (90% or more) of the rentals of the property are for periods of less than 60 days;
– the property is capital property (i.e., not designated as the owner’s primary residence and therefore subject to a capital gain or capital loss on disposition), and the property is used primarily in a rental-income business carried on by an individual or a personal trust with a reasonable expectation of profit and the owner is not a GST registrant; or
– the property is capital property and the property is used primarily in making taxable short-term rentals by an individual or a personal trust that is a GST registrant, even if that owner is not engaged in a business carried on with a reasonable expectation of profit.
If any of the above apply, the purchase contract for the property will need to specify whether GST is added to the purchase price or included in the purchase price to ensure the price has been negotiated properly by the buyer and seller and avoid lost revenue by the seller. If the purchaser is a GST registrant and intends to use the property for short term rentals, an ITC may be available to offset some or all of the GST payable on the property purchase. If the purchaser uses the property primarily (more than 50%) for personal use, that individual is not eligible to claim an ITC for GST paid or payable on the property purchase, even if there will be some taxable short term rentals of that property. Also, if the purchaser changes the use of the property to his or her personal use, the purchaser may be required to account for the GST.
Provided the homeowner is aware of tax obligations and implications of short term rentals on an eventual sale of the property, Airbnb offers a lucrative option for homeowners to offset mortgages and join the sharing economy.