The federal government tabled its fall economic statement Tuesday. If you own a short-term rental property, are wondering if you should be filing the Underused Housing Tax return or plan on selling your business, there are new measures that could impact you. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to discuss what to know.
EWING: What was really interesting is we're using the tax code to essentially try to prohibit certain behavior or drive certain compliance behaviors. So what this says is that for those who are noncompliant with their municipal or provincial rules about short term housing, whether they perhaps, are rentals, pardon me, if they have the appropriate permits or licensing that's required, they will not be able to deduct any expenses related to the short term rentals so that's interest expenses, if there's a mortgage on the property, which will drastically impact the math and the viability of these properties.
PARLEE: It really does have an impact. And I guess, you know, for some people who are listening saying, okay, I mean, some people maybe, you know, do that with their principal residence when they go somewhere and just do something like that. But for others who have another property, is it worthwhile to think about converting that short term rental maybe into a longer term rental so that it does qualify?
EWING: Well, you may have to consider that because if you don't want to comply with the rules, either 30 days or greater or your municipal rules, you know, you are non-compliant. And the net income that you would be receiving isn't going to work anymore. So then we need to think about, do we convert it to a long term rental? Does that math work in terms of after tax expenses? We know that short term rentals tend to drive a little bit more income into investors' hands. The longer term rentals might not provide that same economic benefit to the individual, and they might look at either converting or even selling and having that property put back in the market.
PARLEE: I guess also too, from a timing perspective, this one would not apply until when? When would this new update actually come into play.
EWING: This is a January 1st, 2024, so not too long from now. It's just a little over a month away.
PARLEE: Yeah, you say it like, you know, it felt longer when I looked down at the calendar. And you're right, it is just over a month away. Time flies. Okay. The second thing which we've talked about before is the Underused Housing Tax. I was somebody who was also affected by this. So I remember going through and it was it was very confusing, to say the least. Did we get some clarity this time?
EWING: We did. I think we have some relief here that we have all been advocating for over the last while because it was very confusing for many people to even know if they were required to report or to file as return. And so what has changed is really the the definition. So I guess for those who may not recall, this is the 1% tax on what's supposed to be thought of as foreign property or foreign ownership. And it was capturing a number of people who owned properties with certain structures, so trusts, for example, or joint names is really causing a lot of confusion. The definition for those who are going to need to to file this return has has been limited. So there's more exclusions that will prevent those some of those more niche situations or those inadvertent situations from needing to file. Now, you do need to file for 2022 still, and this was a rule that was originally in 2022. You would have had to file earlier this year. We had an extension to October 31st, and on October 31st we had a further extension into April 30th of 2024. So you would actually need to be filing your 2022 return in 2024 and perhaps not needing to file your 2023 return. So this is still a little bit confusing for some folks, but definitely we have limited the number of people who will need to be filing these returns.
PARLEE: And just to be clear, even if you are somebody who may not be impacted by the UHT on an ongoing basis, the lack of filing, are you still, could you be penalized if you don't file to begin with?
EWING: Oh, yes. Well, if you don't file and this is, again, good news, it was seen as the penalties for noncompliance were a little bit disproportionate. And so we have reduced the $5,000 penalty for not filing to $1,000. So that's good news for those who might not realize what their obligations are and might do a late filing. It's it's not as punitive as it was going to be.
PARLEE: Yeah. All right. Getting a little clearer. That's the best explanation I've heard so far and a cost effective for that to start with. Let's talk about the third thing we heard, and this was more around the idea that for business owners who wanted to sell a business to an Employee Ownership Trust, so again, allowing the employees to buy the business eventually and moving in that direction. There was more news on that. But before we actually get into what the news was maybe just give us the basics on what it was that was proposed.
EWING: And this is a measure that was introduced in an earlier Budget in 2023, and it was designed to allow for more flexibility and more options for those who are selling their business or exiting the business. And it was creating something called an Employee Ownership Trust, which would allow employees to take over ownership and own the shares through a trust. Unfortunately, again, there were some restrictions that were built into these rules that made it not as attractive an option as it was hoped. And so what happened here is we have gone ahead and we are seeing some tweaks are going to be made to that to make it a little bit more attractive. One that is quite substantial is on the first $10 million or 10 million of capital gains will be nontaxable at a time from 2024 to 2026, but that's quite significant. So I think some people might be looking at this as an option whereas they might have been ignoring it up until now.
PARLEE: There's a lot of that you packed in here very concisely. So thank you. But I would just kind of always finish this by saying, you know, for people who want to get a better understanding of whether this applies to them. And again, I'm saying people who maybe have short term rentals, business owners, or if you have a second property in some way, shape or form, who should they talk to?
EWING: So speaking with your tax advisors, your accountants and your financial advisors, particularly where you're looking at whether or not keeping a short term rental is going to be as attractive as it once was. And if we're shifting that type of income, what is deductible, you would want to know that well up front. So work with your investment and and tax advisors on this.