Westboro, Ottawa
Tax work for Westboro's condo owners, independent shops and self-employed professionals
Westboro along Richmond Road has been rebuilt around mid-rise condominiums, a strip of independent retail and studios, and a working population that is heavily self-employed: consultants, designers, therapists, trainers and one-person professional practices. That combination produces two questions this part of the city asks far more often than the rest of it. The first is what happens when a condominium stops being somebody's home and starts being an asset, especially when the rental gets short enough to count as accommodation rather than housing. The second is whether a practice with one person in it should be a corporation, which is a narrower question than it was a few years ago.
Why Westboro is its own case
Residential rent is exempt for sales tax purposes when the occupancy is long term, which is why a landlord renting a condo by the year charges nothing and recovers nothing on the condominium fees or the renovation. Rent the same unit by the night or the week and you are making a taxable supply of short-term accommodation instead, and once your total taxable revenue from everything you do, consulting fees included, passes the small supplier threshold, registration follows. That is only half of it. Moving a unit between exempt long-term use and taxable short-term use is itself a change in use for sales tax purposes with consequences of its own, and it can change whether an eventual sale of the unit is a taxable sale rather than the exempt sale of used residential property that owners assume it will be. Ottawa layers its own rules on top, restricting short-term rental to a host's principal residence and requiring a permit, and federal rules deny the deduction of expenses relating to a short-term rental operated contrary to the applicable provincial or municipal rules. A unit rented by the night without a permit can therefore be taxed on its revenue and refused its expenses at the same time.
On the ordinary rental side, condominiums have their own accounting. The monthly fee is deductible against rental income, including the portion that funds the reserve, but a special assessment levied to pay for a capital project generally is not: it goes to the cost of the unit and reduces the gain later instead. Interest is deductible while the borrowed money is being used to earn income, which makes the tracing of a refinancing important. A rental that loses money every year is fine if there is a genuine source of income behind it, but a unit rented below market to someone you know, or one with no realistic prospect of ever turning a profit, invites the losses to be denied.
For the self-employed professionals, the incorporation question has narrowed, because a corporation earning substantially all of its income from providing services cannot use the excluded shares route out of the rules limiting income split with family members. Paying dividends to a spouse who does not work in the practice is no longer the simple plan it once was, which leaves deferral as the main argument, and deferral is only worth anything if the income is not needed to live on.
The work, as it applies here
Tax Expertise
A rental schedule for a condominium that separates the fee from the special assessment, traces the interest to the borrowing that funded the unit, and handles the sales tax position honestly if any of the rental is short term.
Detailed Bookkeeping
Books for a small independent shop or studio where what you sell is not all taxed the same way, so zero-rated items, taxable items and any point-of-sale rebate are separated at the till rather than reconstructed at the end of the quarter.
Strategic Planning
The incorporation question answered with your numbers rather than in general terms: what deferral is actually worth given how much of the profit you spend, what the annual filing and bookkeeping cost, and what the rules limiting family dividends leave available to a services practice.
Questions from Westboro
- I rent my condo out by the week when I travel. Do I have to charge HST on it?
- Short-term accommodation is a taxable supply, unlike long-term residential rent, so once your total taxable revenue passes the small supplier threshold you have to register and charge tax on the nightly or weekly rate. The threshold looks at everything you supply, so consulting or freelance income counts toward the same total as the rental, and people with a side practice cross it sooner than they expect. Where a booking platform is required to collect the tax on the accommodation itself, that does not automatically relieve you of your own registration obligations for the rest of what you do. The offsetting benefit of registering is that the tax on expenses relating to the taxable use, including furnishings and cleaning, becomes recoverable.
- The condo board levied a special assessment for the garage membrane. Can I deduct it against the rent?
- Usually not in the year it is paid. A special assessment funding a capital project on the common elements is treated as capital rather than as a current expense, so it is added to the cost of your unit and reduces the taxable gain when you eventually sell rather than reducing this year's rental income. Where an assessment genuinely funds a repair that restores something to its previous condition rather than improving or replacing it, there is an argument for a current deduction, and the board's own description of the work is the evidence for it. Ordinary monthly fees are a different matter and are deductible in the proportion the unit is rented, including the part that goes into the reserve fund.
- My condo has lost money every year since I bought it. Will the losses be denied?
- They can be, and the question asked is whether there is a genuine source of income rather than whether the property happened to lose money. Where the unit is rented at market rent to an arm's length tenant and the loss is the ordinary result of financing costs early in the mortgage, the deduction is usually fine, and the losses are absorbed as rents rise. The position weakens where there is a personal element: renting to a relative or a friend below market, occupying the place yourself for part of the year, or holding a unit with no realistic path to profitability. Renting below market to family is a specific problem, since the deduction of expenses can be limited to the rent received, turning the loss into nothing.
- Should I incorporate my consulting practice?
- It is a smaller advantage than it used to be for a one-person services business. The tax split with a spouse or an adult child, which used to be a substantial part of the case, is limited by the rules on split income, and the exception that lets shareholders of many businesses out of them is not available where the corporation earns substantially all of its income from providing services. What is left is deferral: if you leave profit inside the company, you pay the lower corporate rate now and the personal rate later. That is only worth something if you can genuinely leave the money there, and against it sit the annual corporate return, separate books, a minute book and the cost of unwinding it later. If you spend essentially everything you earn, incorporating usually costs more than it saves.
- I run a shop on Richmond Road and some of what I sell is not taxed. How does that work?
- Distinguish exempt from zero-rated, because they look the same at the till and are opposites behind it. A zero-rated supply, such as basic groceries, is taxed at zero and you still recover the tax you paid on your own inputs. An exempt supply is not taxed and you recover nothing on the inputs relating to it. Prepared food and beverages are generally taxable rather than zero-rated, which is the line a bakery or a café straddles all day, and Ontario rebates the provincial portion at the point of sale on qualifying prepared food and beverages sold under a set amount. Getting the classifications right in the till system is what makes the return a matter of transcription rather than an estimate.
- If I sell the condo I used to live in and now rent out, is any of the gain sheltered?
- Part of it, generally. The years it was genuinely your principal residence can be designated and sheltered, and the formula adds an extra year on top of them. The years it was a rental are taxable, with the value at the moment you moved out establishing the dividing line, since converting your home to a rental is a change of use that is treated as a disposition at fair market value. An election is available to defer that treatment for a limited number of additional years if you did not claim depreciation. One warning that applies to anyone buying and selling quickly in this market: residential property held for less than a year is generally deemed to produce business income rather than a capital gain, unless one of the listed life events applies.
Reading that applies
Also covered by this page
These neighbourhoods raise the same questions as Westboro and are handled here.
- Britannia A summer resort at the end of the streetcar line in the 1900s, and still the city's main swimming beach.
- Lincoln Heights The area around Lincoln Fields, where the Transitway is being rebuilt as light rail.
- Carlingwood Named for the shopping centre at Carling and Woodroffe, one of the first malls built in the city.
- McKellar Park A 1920s subdivision west of Westboro, now heavily rebuilt as infill.
- Highland Park An interwar neighbourhood between Kirkwood Avenue and Churchill Avenue.
- Woodroffe An older neighbourhood at the north end of Woodroffe Avenue near Richmond Road.
- Island Park The tree-lined driveway between the Queensway and the Champlain Bridge, lined with embassies.
- Champlain Park A compact grid of streets between Island Park Drive and the Ottawa River parkway.