Understand the implications of sharing assets

You may be one of the millions of Canadians who participates in the sharing economy. But have you considered the tax and insurance implications of renting out your property, or driving others?

Here’s what you need to know.

Timeshares

A timeshare can be a great way to save on vacation expenses. Most are either fee-simple (you own 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 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 you could spend 50% of the sale price on marketing, according to the Timeshare Users Group (TUG). (If you’re buying or selling timeshares, check 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, you 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 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, should check if your timeshare agreements expire on death, which often happens with right-to-use timeshares.

If the agreement doesn’t expire and you want to pass a fee-simple timeshare on to family members, Prekupec says the estate could pay ongoing fees. If they don’t expire, then the heirs may be stuck with an expense they may not want. Depending on the timeshare, yearly fees can set back heirs $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). Regardless, 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 at the time of death and [have] to pay probate tax on it before the title gets transferred.”

Rental reporting

You may want to rent out your timeshare when you’re not using it, or your primary residence if you’re planning a long vacation away from home.

One way to find tenants is through California-based Airbnb, 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, you must fill 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 if you’re listing property online, you should understand the agreements your enter into with these sites, including how the company screens renters and the payment terms.

Carroll adds rent must be claimed as income — even if it’s only from a week or two of renting. Day notes those 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 you subject to CRA’s foreign property reporting rule, which kicks in if the total foreign property cost is more than $100,000. You’d 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 claim a capital cost allowance (CCA) on your tax return when renting out a principal property, or you’ll lose your principal residence capital gains exemption.

Carroll suggests getting 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, you can depend on the timeshare company to take care of maintenance. To get that same convenience when renting out another property, you may want to consider hiring a property management company. Rates vary by municipality and services offered, but you can expect to pay about 8% of the rent you get to the company.

Car for hire

You may earn income by using your own car to drive others. Uber, a California-based tech start-up, allows a potential driver to sign up online. (There are others, 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 4-door vehicle in excellent condition. (This is for UberX service; UberBLACK service has stricter requirements.) After assessing personal details and documents, Uber approves you and gives you a phone with the Uber app so you 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.

Hamilton, Ont., B.C., Manitoba and Quebec 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 you earn business income this way — yes, this is business income that requires a business number — Carroll says you 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 you’re “no different than any other business owner.” Every trip you take in your car will have to be logged, he says, with the date, destination, purpose, and kilometres driven in order to claim deductible expenses.

And, you should ensure you have appropriate insurance and liability coverage before picking up your first fare. Since your vehicle will be classified as a commercial vehicle, you 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.”