Non Residents Purchasing Real Estate in Canada - Part II

Owning a Vacation Property that is Used Personally

Do you own a vacation property that you have in a rental pool but also use personally? Did you register for GST so that you would not have to pay the GST when you purchased the rental property?

Often, because the purchase of real estate is so expensive, purchasers are advised that if they will be renting out the property they should register for GST, so they won’t have to pay the GST when they purchase the property. This sounds great and can be a considerable “savings” when the property is purchased.

However, what has really happened is the purchaser should have reported the GST owing on their first GST return and then claimed an input tax credit (ITC) to the extent that the property is going to be used as a rental property. If the property will also be used by the purchaser personally they may not be entitled to a full ITC. This would mean that GST may have to be remitted on that first GST return.

Here's an example to illustrate this:

Year One

Mr Jones purchases a ski cabin in Whistler. He registered for GST so that he would not have to pay the GST on the purchase. He reported the purchase of the cabin on his first GST return. As he did not have any personal use in year one he was entitled to claim a full ITC on the purchase of the property.

Year Two

Mr. Jones has some more free time and uses the cabin 10 days personally and rents out the cabin for 40 days during the year. He now has more than 10% personal use of the cabin, so is required to pay back to the Government some of the GST claimed on the purchase in year one. This is called a change in use of the property.

Year Three

Mr. Jones uses the property the same 10 days but is only able to rent the property for 30 days. He would calculate his personal use in year three as 10/40 = 25%. As this change is not a 10% or more difference from the personal use in year two of 20%, no adjustment is required to the original ITC claimed.

Year Four

Mr. Jones again uses the property for 10 days but the rentals are only 20 days. His personal use now increases to 33.3%. This is now more than a 10% change so there is an additional change in use calculated. Another adjustment to the ITC is required.

Year Five

Mr. Jones again uses the property for 10 days but has 90 days of rental use. His personal use is calculated as 10/100 = 10%. This is a more than 10% change in use, in the other direction, so he is able to recover some of the GST that was repaid in year one and year four.

Year Six

Mr. Jones is tired of dealing with the rental company and has an opportunity to rent his cabin to some employees of the mountain who will be using the cabin for the entire ski season (five months). This is now a complete change in use as his cabin is no longer being used for commercial rentals. Rentals longer than 30 days at a time are not subject to GST. He will now need to do a complete change in use calculation as his property is no longer being rented on a short term basis. He will treat this change in use as a deemed sale and he will be required to send in GST on the current fair market value of the property.

Just a little bit confusing. Real estate is one of the most complicated areas of GST as there are so many exceptions and different situations that come up that could change what has been discussed.

In the right situations, registering for GST can be very beneficial, however if you plan to use a property personally as well, there can be some hidden surprises with the GST.

Please don’t hesitate to contact me to discuss this further or your local MNP Commodity Tax Specialist.