Understanding the GST Tax Trap on Short-Term Rentals in B.C.
The Province of British Columbia has introduced new rules that aim to make more rental units available for long-term residential use, impacting short-term rental hosts in British Columbia.??
In this article, Crowe MacKay's trusted advisors will explore the recent changes and how new laws impact the short-term rental industry, affecting GST and short-term rental income.???
How the New BC Rules Affect Short-Term Rentals
The new regulations in British Columbia will impact residents and non-residents alike. These measures, designed to alleviate the province's housing shortages, are set to shift the rental market dynamics. As of May 1, 2024, British Columbia is clamping down on transient rentals to drive these properties into long-term residential options.
British Columbia has implemented regulations that limit short-term rentals to primary residences, along with either a secondary suite or an accessory dwelling unit (ADU), in numerous communities across the province.
This requirement pertains to properties located in:
Some specific areas or types of accommodation are exempt from the main requirement, including:?
The implications of this are vast. New regulations aim to restrict the rise in short-term rental properties and increase available housing for residential purchase or long-term rental use. Anyone who doesn't adhere to these rules may be looking at hefty fines and penalties. Those with existing short-term rental properties are now engaged in a complex financial situation, determining what to do with their properties and facing the GST Tax Trap.
What Is the GST Tax Trap??
As owners of short-term rental units in British Columbia gauge the effects of the new provincial legislation, a crucial question arises: What options do you have for your existing property?
You may consider transitioning your property to a long-term rental to allow you to continue to cover the carrying costs of your investment. Or, possibly, you may determine that a long-term rental is not something you would like to pursue, and you may look to list your property for sale. Then, there are the owners who may consider disregarding the new legislation altogether and continue to rent their properties on a short-term basis. Before making any of these decisions, you should understand that GST tax traps are waiting here.
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The GST trap is that no matter if you are registered for GST or not, one of the following will apply:?
The final trap is trying to avoid this by maintaining your short-term rental operations. If you want to avoid selling or changing your short-term rental, new legislation at the federal level denies any deductions for short-term rental where you are not in compliance with provincial or municipal laws. Effective January 1, 2024, this legislation results in 100% of your short-term rental income being taxable, which can be a significant tax hit.
How does GST Apply when You Sell a Short-Term Rental Unit??
When you sell a unit primarily used for short-term rentals, this transaction is classified as a taxable supply. Consequently, as the seller, you may charge and collect GST from the buyer, equivalent to 5% (in B.C.) of the property's fair market value.
Beware: if the purchaser is GST registered, they might refuse to pay the GST upfront, leading to complex understandings of payment responsibility and conversion. As a result, selling a short-term rental property can trigger a significant GST liability—which you may potentially have to deal with.?
For example, if your unit used for short-term rental is sold with a fair market value of $500,000, you may need to collect and remit GST of $25,000 (5% in B.C.).
Where the property is mixed-use for short-term and long-term residential rental, consideration should be given as to what extent of the sale is a taxable supply and if GST will be charged on all or part of the fair market value of the property.
How does GST Apply if You Change from a Short-Term Rental to a Long-Term Rental??
If you decide to transition a short-term rental unit into a long-term rental, this is considered a taxable supply and requires self-assessment and payment of GST. The GST is based on the property's fair market value at the time of the change.?
For instance, if your property, currently used for short-term rentals, has a fair market value of $500,000 when you switch it to a long-term residential unit, you would need to self-assess and pay GST of $25,000 (5% in B.C.).
In cases where a property is mixed-use for short-term and long-term residential purposes, assessing whether the change in use constitutes a taxable supply is important. Additionally, consideration should be given to the requirement of self-assessment and payment of GST on a portion of the property's fair market value.
Conclusion?
Understanding and compliance with GST regulations are important in the evolving landscape of British Columbia's short-term rental market. The policy changes, active as of May 1, 2024, aim to alleviate housing shortages, emphasizing the importance of staying informed and adapting to new requirements; otherwise, fines and penalties may apply.?
Whether you are selling your rental unit or converting it from short-term to long-term use, the implications of GST on these transactions are significant yet complex. Consulting with a trusted Crowe MacKay?advisors?is highly advised, ensuring informed decisions are made based on your needs, as each situation can differ.
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This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual tax needs. This publication is not a substitute for obtaining personalized advice.
If you are looking for Tax Services, Crowe MacKay provides personalized support. Our tax professionals will help you maximize tax-planning opportunities and ensure the minimum amount required by law is paid.