If you’re buying an investment property to be used as a short term rental, investment or an Airbnb, understanding the rules for GST when buying is absolutely critical.

Did you know that if you structure your purchase in the right way, you can literally save yourself from the entire cost of the GST on the purchase?

In the Bow Valley, and Canmore in particular, there are many hundreds of short term rental properties that are eligible for GST deferral. If you are one of those potential investors, reading this one blog post could save you tens of thousands of dollars!

Disclaimer

Before reading this, know that I am not an accountant or a lawyer but I do deal with these properties constantly! This blog post should not be relied upon to make real estate or investment decisions. I have put a lot of time and research into this, but laws and rules constantly change, so please talk to your accountant, lawyer and financial advisor before making any decisions.

What is the point of GST on real estate?

GST, or goods and sales tax (in Canada) is a sales tax that’s designed to be paid by the end consumer. You typically pay this tax when you buy a brand new home, because you are the end consumer that intends to live in it. All of the businesses involved in the creation of the home along the way will pass this GST along to you and claim back any GST they spend in the construction of the property.

When you purchase a rental property, you are, in effect, not the actual end consumer. Your guests staying in the property are really the end consumer, so as long as you are not the one fully enjoying the benefit of the property, you can pass the tax liability onto that consumer. This is why you would charge your guests GST on their stay.

So here’s the good news, if you’re buying a short term rental property that will be operated as a business, you are entitled to defer the GST on the purchase price! If the property you are looking at on the MLS is a price that’s inclusive of GST, you can more than likely get it for that price, minus the tax!

In Canmore, if you are looking to buy a short term rental or an Airbnb property (make sure you check out the blog post I wrote on understanding Airbnb rules in Canmore), you might have a good chance of purchasing it without GST!

Let’s go into a bit more detail about how deferring your GST works and the rules for purchasing without paying it.

When is deferring the GST on a rental property possible?

Deferring the GST is possible in situations where you purchase with the intention of renting out your property on a nightly or short term basis for more than 90% of the year.

You can still use the property for up to 10% of the year (up to 36.5 days per year), but the primary purpose must be as a rental property for business purposes.

The GST will be deferred as long as you continue to rent the property out on this basis. This is determined each year on your tax return.

If you do pay the GST on your purchase and then subsequently rent it out for 90% of the year, you may also be able to apply for a GST refund for the amount after your first year in operation.

If you intend to use your short term rental as a second home or vacation home and plan to use it for between 10 and 50% of the year, you will probably have to pay GST on the amount that you actually use. The remainder of the income’s GST can be reclaimed.

If you do use your property for more than 50% of the year (i.e. more than 182 days), you will be liable to pay the full GST on the current value of the property (not the value at which you purchased the property originally).

If the GST on an income property is deferred, when is it eventually paid?

Essentially, you can defer the GST on your property indefinitely, as long as you continue to use it as a short term or nightly rental.

So is there a time when someone might have to pay the GST?

The answer is yes, if there is a change of use. If you decide to turn your income property into a vacation home for personal use, this is classified as a change of use and the taxes will be payable.

Similarly, if you decide to sell your property to someone else and they decide to use it as a second home, they will be required to ultimately pay the GST. If they decide to use the property as an investment property, then they will take over the responsibility for deferring the GST and should be able to buy it without paying the GST.

Essentially, until someone comes along and holds their hands up and says they want to enjoy the property as an end consumer, the GST is passed on to the next person. While you are using the property as a nightly rental, your guests are the ones enjoying it as a consumer, and they will pay GST on their nightly stays. Simple, right?

Who is eligible to qualify for deferred GST on recreational property?

The following groups are eligible for GST deferrals:

• For the most part, companies, trusts and partnerships are eligible for GST deferral
• Individuals buying a used or second hand property can usually defer GST (i.e they are not buying directly from a developer but buying from someone that has already paid the GST)
• Anyone buying a fractional or part share ownership in a hotel condo (because they can’t use this for most of the year and it’s generally an investment)

If you are buying a new property from a developer, you are most likely going to have to pay GST (but you can usually apply for a rebate from some of it).

If you are buying a rental property, it is a great idea to meet with an accountant to discuss which ownership vehicle makes the most sense for you. In most cases I’ve personally been involved with, buyers will generally purchase through a company so that they are able to defer the GST.

Easy first steps to defer the GST on your income property purchase

• Meet with an accountant to discuss your personal situation
• They may advise you to register your company or partnership
• They may then help you to register that company or partnership for a GST number.

Important things to know about deferring your GST on a STR purchase: from personal experience with clients

There are several steps to take when purchasing short term rentals to ensure that you’re able to defer your GST. Again, if in doubt, chat with your accountant, lawyer and banking professional.

1. Ensure your purchase offer is exclusive of GST. This means you should separate the purchase price and GST on the contract and not bundle everything together (this is the part that the realtor CAN take care of). E.g. if the property is $1,050,000, you should write $1m + GST on the offer and not “$1,050,000 inclusive of taxes”. You should also ensure the offer has an additional clause that allows you to opt to defer the GST if applicable. This is often added as an addendum.
2. Find the right accountant that is familiar with GST rules on short term rental purchases.
3. Ensure you are registered for GST and are able to opt to self assess and pay your own GST. Usually this requires purchasing under a corporation. You need to do this prior to possession day. If you do not put the contract clause in and register for GST, the seller will be responsible for remitting the GST, and you will still need to pay the GST on your purchase.
4. Talk to your bank. You need to let them know that you will be deferring the GST from the get-go. Unfortunately, if they miss this part of the contract, and they fund you the full amount + GST, then your lawyer will be forced to pay this to the seller on possession day. You will then have to hold the asset for a full year before you can claim the GST as a tax credit on the next year’s taxes. Make sure the bank only funds you on the price and not the GST as well. Do not sign the mortgage documents until you are sure you are only receiving the taxes.
5. On possession day, you will need to sign an indemnity that says you are taking responsibility for paying the GST and that the seller is not responsible.

Get in touch

If you’re thinking about buying a short term rental in Canmore or Calgary, reach out to me and I would be happy to connect you with the appropriate accountants to get you set up for this awesome hack! Please feel free to email me at info@robintuck.com or call/text +14034012066