HST & Buying a B&B

When purchasing a re-sale residential home normally HST is included in the price.  Bed and breakfasts are normally zoned residential in the Niagara region.  When it comes to purchasing a Bed and breakfast, the question of HST becomes a little more complicated.  Revenue Canada has produced a document on the subject but it is complicated because it is not black and white.  The questions become:

1) How much were the owners making at the B&B before selling? The magic number is $30,000, if less than then there are no issues.  If greater then other items come into question.

2) Do they have a HST number?  If they were making more that $30,000 per year they will have an HST number.

3) How much of the house were they claiming as Bed and breakfast expenses on their taxes? If less than 50% then the government believes that the house is primarily residential and it should be considered as that.

4) Is the house the seller’s principle residence?  On their income tax returns, do they check the box on the first page indicating it is their principal residence? 

5) Are they selling it as a turnkey business?

6) If they renovated the property, did they take input tax credits?

Depending on who you talk to, a lawyer verses an accountant you will be given different answers especially if you are the seller or the buyer.  Which ever you are, the best advice is make sure you have time to investigate the issues before you sign the agreement.

In Niagara, the normal procedure is if you are buying an existing B&B and are going to continue the operation, on the purchase agreement the sale is subject to HST (ok are you scared?) however in Schedule” A” a clause is added that states you will be continuing the operation, will have registered for a HST number prior to closing, and will continue to give the government their HST each year.  This becomes a paper transaction verse actually having to pay the HST.

Because of this issue, many B&B owners that are thinking of selling start to wind down the business.  By bring the business revenue to under $30K, they give up their HST number - it is no longer an issue and their house can be sold as residences or the new owners can build up the business again.  The new owners are not scared that they will be responsible for the HST.  The down side of doing this is new owners look at the B&B revenue and think that is all they can get.  If you are thinking of purchasing a B&B that the owner has reduced the revenues – the real question is how much potential is there. What are the B&Bs in the neighbourhood making and how does the particular B&B compare to the one you are thinking of purchasing.