Tax implications of buying vacation homes

1437670382185If your clients are thinking of buying a vacation property, they should be aware of tax implications and other important considerations.

Provincial Property Transfer Tax

The Property Transfer Tax (PTT) is charged whether your clients buy undeveloped land, a second home, a strata property, or fractional ownership.

Even if your clients have never owned a home before, they won’t qualify for the First Time Home Buyers’ Exemption Program because the home isn’t their principal residence.

Vacation homes as rental properties

  1. If your clients plan to rent their vacation properties, make sure rentals are permitted. Stratas may not allow rentals as outlined here.
  2. Some municipal bylaws also restrict rentals and impose specific conditions. For example, Whistler has Temporary Tourist Accommodation Regulations. Check to see if rentals are permitted using Whistler’s GIS mapping system.

There are significant tax differences between:

  • occasionally renting a vacation property such as a cottage; and
  • buying a vacation property as an investment property to rent.

Your clients must keep detailed records and receipts to document net rental income (revenue less expenses).

Expenses could include advertising the rental property, cleaning, maintenance, repair, utilities, property taxes, property management, insurance, and accounting fees.

Your clients may also have to register for a GST number since the GST applies to rentals. For detailed information, read this Canada Revenue Agency (CRA) information.

If they’re using a property as an investment, they may be eligible to claim the Capital Cost Allowance (CCA) for rental property.

They may also be eligible for a GST/HST new residential rental property rebate.

As property owners, your clients must complete Form T776, Statement of Real Estate Rentals and, if applicable, Rental Losses.

Federal capital gains tax

As property owners, your clients must pay Capital Gains Tax on a second property (non-principal residence) when the property is sold or transferred.

For example, if a client buys a Whistler townhome for $500,000, and a decade later the property is valued at $750,000 when he dies, the capital gain is $250,000. Half of that amount, or $125,000, is taxable.

However, if your client’s spouse is still alive, ownership can be transferred to him or her. Known as a spousal rollover, this transfer can delay capital gains taxes.

Other considerations

Land use and zoning

If your clients plan to build a vacation home, they should ask the local municipality about zoning regulations and future development plans.

Services

If your clients plan to buy property in a remote area, they should be clear about where they’ll get services such as electricity and water. With BC becoming drier, relying on a well might not be the best option.

Vacation property buyers should seek professional advice from Revenue Canada. They can be reached at 1-800-959-8281.

For more information, please contact: Gino Pezzani.

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