CRA Has Its Sights on Rental Income

Investing in condominiums operated as hotels — where you own individual units that are often split into one-quarter shares — can present some income-earning opportunities, but they can be complicated when it comes to GST/HST.

If you are considering one of these investments, keep in mind that you must pay 5% GST; 13% HST on the purchase price and cannot claim the GST/HST new housing rebate because neither you nor your family will occupy the unit. Nor can you claim the GST/HST Rental Property rebate, because the unit is not rented out on a long term basis.

However, if you are a GST/HST registrant, you can buy the unit without paying the GST/HST. This is because when a property is used 90 per cent or more for commercial purposes, a GST/HST-registered buyer can claim an input tax credit equal to the GST/HST paid on the purchase.

There a few issues you should keep in mind related to owning short-term rental condos to help ensure you stay within tax law and survive potential audits of this favorite CRA target:

1. Rentals for fewer than 60 days aren’t characterized as residential complexes, which are exempt from GST/HST. Instead they are usually characterized as “hotel, motel, inn or boarding house, lodging house and other similar premises.” That means GST/HST is charged on the rentals and you can claim input tax credits on GST/HST paid on expenses relating to them.

2. If you or your family does stay in the unit, you will have to allocate a portion of the input tax credits as personal. That portion cannot be claimed as input tax credits, even if they are related to the purchase of the unit. When personal use is more than 50 per cent, you cannot claim any input tax credit on the purchase price.

If you do want to stay in the condominium complex, say for a vacation, you are generally better off staying in another unit and paying rent or arranging a swap with another unit holder. In the latter case, you both report rental revenue on the use of each other’s units.

3. Management companies who typically run these complexes do not claim input tax credits on expenses related to the units, although they do usually collect and remit GST/HST on the unit rentals. The companies will send you monthly reports on revenues and expenses. In addition, the management companies normally take care of renting units, the day-to-day operations of the complex and other routine matters.

Your record keeping is minimal, generally consisting of keeping the management company’s annual report to you and retaining receipts for expenses associated with the rental unit.

Here is an illustration of the types of expenses that are usually incurred and the GST/HSTrefund that would result if you were registered for GST/HST:

	Expense ($)	Input Tax Credit ($)
GST/HST self assessed on purchase — $5,000		(5,000)
Unit purchase, GST/HST offset by tax credit	100,000	5,000
Net GST/HST payable on purchase price		NIL
Costs typically subject to GST/HST and refunds registered owners can claim	Cost	Claim
Legal costs on purchase Management fees Maintenance and Repairs Travel Strata Fees	1,500 10,300 2,900 500 2,400	75 515 145 25 120
Total		880

The refund depends on the amount of GST/HST paid out. The more expenses are subject to GST/HST, the greater the refund.

One final caution: You must be registered for GST/HST before the sale closes, or you cannot claim the input tax credit on the purchase. Talk to your tax professional before you purchase the unit if you think that you might benefit by registering for GST/HST.