If your clients have timeshares, rent out their properties on websites or use their cars to drive paying customers, they need your expertise when it comes to taxes, insurance and estate planning.
A timeshare can be a great way to save on vacation expenses. Most are either fee-simple (your client owns a share of the property) or right-to-use (no actual property ownership). Beyond the one-time property and closing costs, there are ongoing maintenance fees for regular repairs and special assessments for unforeseen repairs, such as those from a natural disaster.
Although a timeshare may make sense for your client’s circumstances, it’s not really an investment, since profiting on a timeshare sale is rare. “There’s just too much inventory out there,” says Greg Prekupec, a principal at N. Gregory McNally & Associates in Staynor, Ont.
Not to mention that the client could spend 50% of the sale price on marketing, according to the Timeshare Users Group (TUG). (For clients buying or selling timeshares, steer them toward the resale market on TUG2.com, eBay.com or Redweek.com.)
If a sale does result in a capital gain, that gain must be reported to CRA, no matter how modest. To calculate the amount, your client must know the adjusted cost base (ACB) of the timeshare, which consists of the actual cost of the timeshare plus capital expenditures, such as special assessments used for capital improvements—a new roof, for example.
Doug Carroll, vice-president of tax and estate planning at Invesco Canada in Toronto, says your client’s ACB isn’t affected by timeshare maintenance fees because those are current expenses.
Losses on sale are not deductible, says Carroll. “It’s personal-use property, and if you sell it, you can’t take a loss on it.”
When considering estate planning, clients should check if their timeshare agreements expire on death, which often happens with right-to-use timeshares. If the agreement doesn’t expire and your client wants to pass a fee-simple timeshare on to family members, Prekupec says the estate could pay ongoing fees. Another possibility is that the heirs may be stuck with an expense they may not want. Depending on the timeshare, yearly fees can set heirs back $300 to $2,000 or more, and special assessments vary widely.
Prekupec also warns, “As the timeshare depreciates in value, the fees will likely increase.” The timeshare company can’t go after the beneficiaries if they don’t pay, but it can go after the estate. Meanwhile, late fees will accumulate.
Carroll suggests clients discuss the situation in advance with family members, who may not be interested in keeping the timeshare. Ngoc Day, fee-only advisor at Macdonald, Shymko & Company in Vancouver, B.C., agrees, noting that a timeshare probably won’t have the sentimental value that a family cottage does.
With fee-simple timeshares located in the U.S., there’s also potential for U.S. estate taxes to come into play if the property brings the estate’s value above US$5.43 million (2015). Still, Day suggests couples own a timeshare jointly to avoid probate fees, at least on the death of the first spouse. Without joint ownership, a surviving spouse “would have to figure out a valuation for what the timeshare’s worth [was] at the time of death and [have] to pay probate tax on it before the title gets transferred.”
You may have a client who wants to either rent out her timeshare when she’s not using it, or her primary residence if she’s planning a long vacation away from home.
One way to find tenants is through California- based Airbnb (airbnb.ca), which lists rental properties—homes, apartments or even rooms—in more than 34,000 cities. (Others include VRBO.com and HomeAway.com.) To list space, your client fills out a free online form detailing house type, room type (if applicable), number of people the rental accommodates, and location. The company verifies renters’ personal profiles, offers a messaging system for hosts and guests and collects payment, keeping 3% per online booking.
Prekupec says clients listing property online should understand the agreements they enter into with these sites, including how the company screens renters and the payment terms.
Read: Tax tips for cottages
Carroll adds that rent must be claimed as income—even if it’s only from a week or two of renting. Day notes clients with U.S. timeshares or property must declare U.S. income, and the process can be onerous.
“You have to get your tax-reporting number, [similar] to a SIN here, for the U.S., and that’s complicated,” says Day, not to mention the complexity of U.S. tax forms. The penalty for not reporting is usually 5% of the unpaid taxes for each month a return is late, up to 25% of unpaid taxes. There are additional penalties for failing to pay taxes owed.
Worse, a rented fee-simple timeshare can make clients subject to CRA’s foreign property reporting rule, which kicks in if the total foreign property cost is more than $100,000. Clients then have to fill out the T1135: “The timeshare value itself may be small, but if you add it to the U.S. stocks that you already own, that may bring it over to $100,000, so now you may end up with extra tax reporting to CRA.” The penalty for not filing the T1135 is $25 per day, up to a maximum of $2,500 per filing year.
Aurèle Courcelles, director of tax and estate planning at Investors Group in Winnipeg, says U.S. withholding tax on foreign income, which is 30%, “adds a whole other level of complexity” when renting out a U.S. timeshare, as do logging expenses to calculate possible deductions, although these would be negligible for a timeshare. He offers this tip: don’t allow your client to claim a capital cost allowance (CCA) on her tax return when renting out a principal property, or she’ll lose her principal residence capital gains exemption.
Carroll suggests clients get appropriate insurance coverage. But, the cost and availability of short-term coverage could be prohibitive.
Vancouver-based Square One Insurance, for instance, offers homesharing insurance, which typically has higher premiums (in Square One’s case, 10% higher) and substantially higher deductibles ($2,500, versus $1,000) than regular property insurance.
When renting out a timeshare, your client can depend on the timeshare company to take care of maintenance. To get that same convenience when renting out another property, your client may want to consider hiring a property management company. Rates vary by municipality and services offered, but your client can expect to pay about 8% of rent for property management.
Participating in the sharing economy may seem like easy money at first, but your clients will still have to put in the work:
- All income, no matter how small, must be reported to CRA.
- Excellent record keeping will be required to claim expenses.
- Agreements with online sites must be clearly understood.
- Higher insurance premiums and deductibles must be paid.
Car for hire
Your client may earn income by using her own car to drive others. Uber, a California-based tech start-up, allows a potential driver to sign up online. (There are others like it, including Lyft and Sidecar.) A driver must meet the requirements (21 years old, personal licence, personal car insurance, background check) and have a mid-size or full-size four-door vehicle in excellent condition. (This is for UberX service; UberBLACK service has stricter requirements.) After assessing personal details and documents, Uber approves your client and gives her a phone with the Uber app so she can start accepting fares.
But this opportunity may be a non-starter if recent Canadian activity surrounding Uber is any indication. Some jurisdictions aren’t taking kindly to what they say are essentially unlicensed taxi drivers.
B.C., Manitoba, Quebec, and Hamilton, Ont. have issued warnings to drivers attempting to work on a contract basis for the company. And, in California, the company faces lawsuits from drivers claiming they’re employees, not freelancers, and should have accompanying health benefits. But if your client earns business income this way—yes, this is business income that requires a business number—Carroll says clients must keep excellent records to justify deductible expenses related to the earned income.
Courcelles agrees, saying some people might not realize there are tax implications to “picking up somebody, dropping them off and getting paid to do that,” and that your client “is no different than any other business owner.”
Every trip your client takes in her car will have to be logged, he says, with the date, destination, purpose and kilometres driven in order to claim deductible expenses.
And, your client should ensure she has appropriate insurance and liability coverage before picking up her first fare.
Since your client’s vehicle will be classified as a commercial vehicle, she can expect the corresponding increase in premiums. (South of the border, insurance firms are starting to offer coverage specifically for Uber-type drivers.)
Ultimately, participating in the sharing economy requires a high level of diligence. Carroll notes that CRA explicitly requires individuals to report income earned from webpages or websites. According to CRA’s website, this includes “online marketplace websites where your goods and/or services are sold.”
Although this may be a reminder to clients generating income from peer-to-peer marketplace sites like eBay or Etsy, Carroll suggests all clients be aware of the potential going forward for greater income reporting.
by Michelle Schriver, assistant editor of Advisor Group.