Are you renting out your chalet, or looking to buy a vacation property? Beware of tax rules!

They’re known as cottages, vacation properties, country homes and second homes. Over-subscribed since the pandemic, the chalet (or accommodation unit) has become a rare commodity for anyone dreaming of spending a few days away from it all. Digital accommodation platforms such as Airbnb Vrbo” and “Booking.com” are coming to terms with this new reality, with their calendars now filled weeks, if not months, in advance. All rental properties have turned into a veritable goldmine. It can be very tempting to offer your second home as a tourist accommodation unit to benefit from an additional source of income. However, it’s important to understand the impact of renting out your second home as a vacation property, and all the sales tax compliance that goes with it. Tourist accommodation is governed by specific standards.

Our expert, Sylvie Therrien, consumer tax partner at Amyot Gélinas S.E.N.C.R.L., summarizes the rules to observe in the lodging industry.

First of all, it’s important to know that GST/HST and QST registration is mandatory when total taxable income from temporary rentals and other taxable income exceeds $30,000. A person who rents out his or her vacation property is considered a small supplier and will not be required to register for taxes if the total of all sources of taxable income is less than or equal to $30,000 throughout a given calendar quarter or during the four calendar quarters preceding the given quarter. In addition, this small supplier threshold applies to each co-owner of the building. So, if Mr. and Mrs. each own a cottage in equal shares, their total taxable income must exceed $60,000 before they are required to register for taxes and collect and remit taxes on their taxable income. However, they may decide to register voluntarily at any time.

De quoi sont constitués les revenus taxables tirés de la location d’une résidence touristique ?

First of all, it’s important to understand the terms “provisional rental” and “provisionally rented”, which mean that the vacation property is rented for a continuous period of less than one month. In this case, rental revenues are subject to GST/HST and QST if the rate charged exceeds $20 per day. In addition, all other additional charges billed to guests, such as housekeeping and administration fees, are subject to GST/HST and QST, as is the 3.5% lodging tax, which is also subject to GST and QST.

In fact, collection of the lodging tax is mandatory when a lodging unit is offered for rent in return for payment,

pour une période n’excédant pas 31 jours, à des touristes sur une base régulière au cours d’une même année civile;
lorsque sa disponibilité est rendue publique.

If the lodging unit is rented solely through a digital hosting platform registered with the lodging tax file, and this platform is responsible for billing and collecting rental revenues from the unit, then you are not required to be registered with the lodging tax file. However, it is important to validate that the digital hosting platform is registered for this tax. To do this, we recommend that you consult the list of persons operating a digital platform and registered for the lodging tax directly on the Revenu Québec website.

Loi sur les établissements d’hébergement touristiques

Furthermore, in Quebec, the Tourist Accommodation Act and Regulations stipulate that a certificate of registration is required when an accommodation unit is offered to tourists for periods not exceeding 31 days. Owners of these establishments are required to obtain a notice of compliance from the municipality in which the establishment is located, confirming eligibility for tourist rental activities. Next, they must apply for registration with the Corporation de l’industrie du tourisme du Québec (CITQ). A certificate of registration will be issued to operators, which must be displayed in public view and transmitted to operators of transactional digital accommodation platforms.

What are the sales tax rules for mixed-use properties, i.e. those used for both personal and rental purposes? Be careful! Special tax rules can cost you a lot of money.

“But how do we determine personal use of property?” What do we mean by unoccupied days and what is the interpretation of the tax authorities?” asks Ms. Therrien.

Tax authorities consider unreasonable a method where all unoccupied days are automatically considered as days when the property is used for commercial activities. In fact, the tax authorities do not accept that days unoccupied but available for temporary rental is a fair and reasonable method of determining business activity. A method based on the number of days the property is used for personal purposes and the number of days rented as a tourist residence is an acceptable method for determining the percentage of use in commercial activities.

“The actual use of the tourist accommodation must therefore be taken into account. Also, it’s very important to keep records and calendars of rental days, as well as any proof of your personal use of the property,” adds Sylvie Therrien, partner at Amyot Gélinas, S.E.N.C.R.L.

Vente ultérieure, qu’en est-il ?

When selling your cottage that has been used as a tourist accommodation, you need to be very careful about the rules that apply in this respect.

First of all, if the individual registered for GST/HST and QST has claimed a refund of the taxes paid on the purchase of the property, any subsequent sale of the property will be taxable. The same will apply when the tax-registered individual owner uses the vacation property primarily (i.e. more than 50% of the time) for temporary rental purposes.

Also, the tourist residence will be taxable in the following situation:

Le particulier propriétaire ne l’utilise pas plus de 50 % du temps comme lieu de résidence, et;
L’immeuble est loué en totalité ou presque (90 % ou plus) pendant des périodes de moins de 60 jours.

However, the sale of a vacation property may be tax-exempt if the individual owner has not applied for a refund of taxes paid on the last acquisition or on any improvements made to the property following the purchase, and the property is used as a place of residence more than 50% of the time.

At the time of sale, a precise analysis of the actual use of the property (personal and rental use) and the various applicable rules must be precisely reviewed before we can confirm the application of taxes.

In short, when buying or selling a vacation property, individuals must be well aware of their tax obligations. Whether resident or non-resident, tax-registered or not, you’ll need to make sure you comply with the legal standards associated with operating a tourist establishment. We recommend that you consult our Commodity Taxes team to help you avoid financial problems.