Selling a cottage is a major financial decision, and one of the complexities that can arise is determining whether the sale is subject to the Harmonized Sales Tax (HST). The applicability of HST is influenced by various factors, such as the cottage’s use during ownership. This guide provides an in-depth exploration of how HST may apply to the sale of cottages in Canada, focusing on key considerations that cottage owners need to understand. Remember, this article is for informational purposes only and does not replace professional tax or legal advice. Always consult with a qualified expert to ensure the best outcome for your specific situation.

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Residential Complex vs. Commercial Property

Understanding whether your cottage is classified as a "residential complex" or "commercial property" is essential to determining HST applicability:

• Residential Complex: Generally, the sale of a used residential complex is exempt from HST. This means that no HST is charged to the buyer, and the seller does not remit HST to the Canada Revenue Agency (CRA).
• Commercial Property: The sale of commercial property is subject to HST. In this case, the seller must charge HST to the buyer and remit it to the CRA.

The core challenge for cottage owners is determining how the CRA classifies their property. This classification hinges on usage patterns throughout the ownership period.

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Factors That Influence HST Applicability

Several factors are critical in determining whether your cottage is viewed as a residential complex or commercial property:

1. Short-Term Rentals (STRs)
   • Definition: STRs involve rentals for periods of less than 60 days.
   • Impact: If your cottage is frequently rented for short stays, especially through platforms like Airbnb or VRBO, it’s more likely the CRA will classify the property as commercial. Factors such as rental frequency, duration, and amenities provided will be assessed.
   • Example: A cottage rented out for weekend getaways with additional services (Wi-Fi, concierge) is more likely to be considered commercial than one occasionally rented to family or friends.
2. Long-Term Rentals (LTRs)
   • Definition: Rentals that last for 60 days or more.
   • Impact: If your cottage is regularly rented for extended periods, it suggests residential use, which could make the sale exempt from HST.
   • Example: Renting your cottage to a single tenant for an entire winter season (3-4 months) would strongly support a residential classification.
3. Personal Use
   • Definition: When the cottage is used by the owner or their family, often without charge.
   • Impact: Significant personal use supports the residential classification. The more you use the property yourself, the less likely it will be viewed as a commercial property.
   • Example: Using the cottage for personal vacations for several weeks each year helps maintain its residential status.
4. More Than 50% Personal Use Test
   • If more than half of the cottage’s usage is for personal use (compared to rentals), this is a strong argument against HST applying. Keeping accurate records of all uses is crucial to proving this.

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The Role of GST/HST Registration and Input Tax Credits (ITCs)

1. Mandatory GST/HST Registration: If your STR revenue exceeded $30,000 within any 12-month period, you were required to register for GST/HST. This means you had to charge HST to renters and remit it to the CRA. If you were registered, the sale is almost certainly taxable.

1. Voluntary GST/HST Registration: Even if your STR revenue was below $30,000, you might have voluntarily registered for GST/HST to claim Input Tax Credits (ITCs). ITCs allow you to recover GST/HST paid on expenses related to the cottage (e.g., repairs). However, this generally makes the sale taxable.

1. ITCs and Commercial Use: If you claimed ITCs on cottage expenses, the CRA is more likely to view the property as being used for commercial purposes. This would result in the sale being taxable, regardless of other factors.

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The Change-in-Use Rules

Significant changes in how the cottage is used (e.g., shifting from personal use to commercial use) can trigger tax implications:

• Deemed Self-Supply: A shift in use by more than 10% toward commercial use can trigger a “deemed self-supply.” This means you’ll be treated as if you sold the property to yourself at fair market value and must remit HST. Example: If your cottage was previously 90% personal and 10% short-term rental, and you then changed the usage to 50% personal and 50% rental, the change-in-use rules would likely apply.

• Non-Arm’s Length Transactions: If you transfer the cottage to a corporation you control, the change-in-use rules could also apply.

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Principal Residence Exemption (PRE)

Even if the cottage is considered a residential complex and exempt from HST, the sale could still have capital gains tax implications:

• Capital Gains: If the cottage qualifies as your principal residence, you might be able to claim the Principal Residence Exemption (PRE) to eliminate or reduce capital gains taxes on the sale.
• Depreciation (CCA): If you’ve claimed Capital Cost Allowance (CCA) on the cottage, you can’t claim the PRE for the portion of the gain related to the depreciation. This portion will be taxed as a "recapture" of CCA.

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Handling Mixed-Use Cottages

Many cottage owners have properties that are used for a combination of personal, short-term, and long-term rentals. Here's how to navigate this complexity:

• Calculating Usage Percentages: Keep detailed records of how often your cottage was used for personal stays, STRs, and LTRs. This is especially important for the year or two leading up to the sale.
• The 10% Rule: If more than 10% of your rental income comes from LTRs (60 days or more), this strongly supports the residential classification.
• Primary Use at Time of Sale: The CRA will focus primarily on how the cottage was used in the final year or two before the sale. If the predominant use was residential, the sale is more likely to be exempt.
• Intention vs. Actual Use: The CRA places more importance on actual usage patterns than on your intentions. Even if you intended to use the cottage personally, frequent STRs may trigger HST.

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Example Scenarios

1. Likely Exempt
   • Ownership: 7 years
   • Rental Use: 70 days of LTR, 120 days of STR, significant personal use (60 days/year).
   • Revenue: STR revenue under $30,000
   • ITCs: None claimed
   • Result: Likely exempt from HST.
2. Likely Taxable
   • Ownership: 3 years
   • Rental Use: 200 days of STR, minimal personal use.
   • Revenue: STR revenue over $30,000 in year 2 (requires GST/HST registration).
   • ITCs: Claimed on renovations.
   • Result: Likely taxable.
3. Grey Area (Requires Professional Advice)
   • Ownership: 5 years
   • Rental Use: 80% personal use, 20% LTR; in final year, 70% STR and 30% personal use.
   • Revenue: STR revenue under $30,000.
   • ITCs: None claimed.
   • Result: This is a complex case that may trigger change-in-use rules. Professional advice is needed.

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Recommendations for Cottage Owners

• Record-Keeping: Maintain detailed records of all uses of the cottage (personal, STR, LTR), including dates, rental agreements, guest lists, and cottage-related expenses.
• Accurate Calculations: Regularly track the proportion of personal use versus rental use to ensure you have accurate data when it’s time to sell.
• Consult a Tax Professional: Before listing your cottage, consult a tax lawyer or accountant to understand the HST implications. A professional will provide clarity and help avoid unexpected tax consequences.
• Consult a Real Estate Agent: Our Coldwell Banker Horizon Realty agents are well-versed in the intricacies of cottage sales. They can connect you with tax professionals and guide you through the process, ensuring that you’re fully informed and prepared.

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Conclusion

Navigating the complexities of HST on cottage sales requires a detailed understanding of CRA guidelines and a clear analysis of your property’s usage. While this article provides an overview, consulting a professional is vital to ensure compliance and minimize tax liabilities. Your Coldwell Banker Horizon Realty agent is here to support you every step of the way.

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