New Tax Rules Target Airbnb, Vacant Properties & Flippers.
The Ontario provincial budget introduced on April 27, 2017 proposes a number of taxes affecting real estate.
The most publicized is the 15% foreign buyer tax, or “non-resident speculation tax” as the government is calling it. We have a dedicated page on the NRST as well as an earlier Tax Blog post.
This post will focus on three other measures that have received less attention but are important for those affected: new powers for the City of Toronto to tax transient accommodations such as Airbnb, new powers for the City to tax vacant properties, and information collection and sharing requirements to target people who assign or “flip” real estate without paying enough taxes.
Airbnb Tax
Toronto will have the power to tax Airbnb. Host also need to consider income tax and GST/HST on rentals.
Following on the heels of the Federal Government’s move to charge federal sales tax (GST/HST) on Uber and ride sharing (discussed in an earlier Tax Blog post), the Province of Ontario is getting in on the act and giving the City of Toronto the power to tax another sharing economy disrupter – Airbnb. The City will have to power to make by-laws to charge a City tax on transient accommodations such as Airbnb and to require certain persons to collect the tax on behalf of the City. If provincial and federal sales taxes are any indication, the most likely candidate to be required to collect the tax will be Airbnb hosts. There is no indication yet what the tax rate may be. Details will emerge if and when by-laws are introduced.
The proposed Airbnb City tax is really just the tip of the tax iceberg for Airbnb hosts. In addition, providing accommodations in one’s home for money raises questions like whether hosts are required to charge GST/HST, income tax requirements, and whether it would affect the all-important principal residence exemption when the house is sold.
Vacant Property Tax
The City of Toronto is also getting the power to impose a vacant property tax applicable to residential properties. The City will be able to define what constitutes a “vacant” property for purposes of the new tax, and will have to power to audit and inspect properties. The tax will be based on the assessed value of the property as determined for property tax assessment purposes. There is no indication yet what the tax rate may be. Details will emerge if and when by-laws are introduced.
Targeting Assignments & Flippers for Tax
Assignors, or “flippers” typically sign purchase and sale agreements but never “close” on the purchase. Instead, they sell or assign the original agreement to a subsequent buyer, for a fee. The subsequent buyer then closes on the purchase and takes title, or may even re-assign to another buyer. Assignment may be attractive in a market with rapidly rising prices or on properties purchased at the pre-construction stage when builders are typically incentivized to sell units in order to access construction financing.
The Budget proposes to require purchasers to declare whether they are purchasing properties on assignment or similar arrangements at the time of registering title and paying land transfer tax (“LTT”). This will allow the Province to check if purchasers are paying sufficient LTT; it wants the consideration paid for the assignment to be included in the value of the property in calculating LTT.
Significantly, the Province is also indicating it will be cooperating with the federal government (the Canada Revenue Agency) to ensure that people who assign properties (i.e., sellers) are paying appropriate federal income taxes and charging appropriate GST/HST. As stated in the 2017 Budget:
Ontario also intends to work with the federal government to explore more comprehensive reporting requirements related to paper flipping. This would better enable the Ministry of Finance and the Canada Revenue Agency to ensure that the correct federal and provincial taxes, including income and sales taxes, are paid on purchases and sales of real estate in Ontario.
People who sell real property (including by assignment) have to determine if they must pay income tax as business income (highest amount of tax), capital gains (half of the gain is taxed), or no tax at all (the principal residence exemption). In addition, sellers of new or substantially renovated residential properties must determine if they are required to collect GST/HST. Thus, provincial measures to make purchasers pay appropriate land transfer taxes could have a big impact on sellers for federal income tax and sales taxes on real estate.
The government uses the term “flipper,” which has a negative connotation. However, purchasers often do not close on deals for legitimate reasons. Unfortunately, assignments are often targeted for tax audits where CRA will assume the worse. Combined with a new detailed information statement required to close on properties after May 5, 2017 (reported in our Tax Blog), it is reasonable to expect that CRA audits of property transactions will become even more frequent.
Simon Thang, LL.B, LL.M (Taxation) is tax lawyer advising exclusively in the areas of Canadian transaction taxes (GST/HST, PST, Land Transfer Tax), and customs and trade. He is the principal of Thang Tax Law.