Planting roots in a new country is both exciting and worrisome. Many of us have contemplated owning foreign property that earns while we aren't staying in it. It can be a great blend between a cash flowing asset whose value hopefully ripens over time, and one that is enjoyed while residing.
We see this with "ski" condos at Kelowna's Big White ski resort. Non-residents purchase, stay a few weeks per year enjoying the fruits of their labour, and then short-term rent their unit the rest of the season in the rental pool. It can be a good investment, but carries tax filing issues. This article discusses common issues in the context of short-term rental investment properties.
General Sales Tax or GST
GST is one of Canada's commodity or consumption taxes, and is generally levied at 5% of a good or service's cost. Not every purchase has GST levied on it, including certain real estate transactions, so rules can often be misunderstood. GST applies to all real estate transactions unless there is an exemption. This is commonly mis-interpreted as GST being applicable only in certain transactions.
The common question that crosses our desk is: "If I get you to register me for GST, that's how I avoid paying it on closing right?" The answer is "maybe" because it involves two parts.
First, what did the Seller use the property for? In our scenario, we assume it was used all or substantially all in a rental pool with some personal use by the previous owner – 10% or less of the season. Given the average stay at a ski-lodge, this means short-term rentals and likely makes the property a business property vs the more commonly seen GST exempt rental home. So, the Seller very often needs to charge GST in this fact pattern.
Second, where a non-resident purchases that condo with the intent to rent it out on a short-term basis (say daily or weekly), they may register for a GST number so that some or all of the GST on purchase can be deferred until a future sale or change in use of the property. A future sale triggering GST is straightforward. When selling, remember that it's your responsibility to charge GST and the Buyer's job to show why they may not have to pay it directly upfront. But what is a "change in use"? This refers to when the percentage of use of an asset that changes to something that has different GST implications. Common situations are converting it into a long-term residential rental (ie monthly housing rents) or principally into a personal use vacation property. Applying these rules are fact specific, and can trigger GST payable despite not yet selling the property. Clear as mud, I know – it can be a complicated root system to monitor and keep healthy.
Income Tax
As rents are earned, the Government will want its share of the harvest. To that end, the bigger items to keep in mind include:
1. Withholding taxes on rents. Without certain filings, non-residents' property managers or tenants are required to withhold and remit 25% of gross rents paid to Canada Revenue Agency. Despite being the payor's responsibility to withhold, the non-resident who files an annual rental income tax return can still be held liable for at least the interest on missed withholdings.
2. Net income tax on rents. The non-resident may file an income tax return to calculate their taxes on a net rental income vs a gross rental income basis. This is often beneficial given common operating costs can reduce net income dramatically.
3. Filing on time is key because CRA doesn't allow late-filed return in most cases.
When it comes time to sell your property, another set of withholdings are required in addition to a separate income tax return reporting the sale. Again, without extra filings that are time sensitive (within 10 days of closing) the withholding tax can be as high as 50% of a portion of your sale proceeds. Often enough the withholding required may stop a transaction where insufficient funds net of withholdings are left to pay off any mortgages. More so than the annual rental returns, selling your matured property needs to be planned with your advisor well in advance to avoid unforeseen tax consequences and cash flow problems. Not doing so would be like cutting down your 40' tree, turning your back, and allowing it to fall where it may.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
