The rise of short-term rental platforms like Airbnb has transformed how property owners approach renting their properties. Short-term rentals provide an opportunity to generate additional income; however, they may come with hidden tax implications that can catch you off guard.
A recent case in the Tax Court of Canada, 1351231 Ontario Inc. v. The King, serves as a critical reminder of the potential Airbnb and GST/HST implications associated with renting out properties on a short-term basis.
The taxpayer in this case purchased a condominium in Ottawa, initially renting it out under long-term leases for nine years. However, from February 2017 to April 2018, the condominium was listed and rented through Airbnb, with all "leases" being short-term rentals. Then, in 2018, the condominium was sold with no HST collected on the sale.
Canada’s Excise Tax Act imposes GST/HST on every “taxable supply made in Canada.” A “taxable supply” essentially refers to any commercial activity, and it captures most business transactions—including the sale of real property. As a result, the sale of Canadian real property will typically trigger GST/HST liability unless the sale qualifies as an “exempt supply.”
An “exempt supply” is a transaction for which the supplier (vendor) need not charge GST/HST but cannot claim input tax credits (ITCs). A complete list of transactions that qualify as exempt supplies is provided in Schedule V of Canada’s Excise Tax Act.
One example of an exempt supply is the sale of a Canadian property that was used exclusively for long-term residential rentals. This exemption applies if the property meets the definition of a “residential complex” under subsection 123(1) of the Excise Tax Act. The Act uses the term "residential complex" to refer to residential property; however, it is important to note that, under the Act, a "residential complex" does not include "a hotel, a motel, an inn, a boarding house, a lodging house, or other similar premises" where all or substantially all the rentals are for less than 60 days.
In the case in question, the Minister took the position that the appellant’s short-term leasing of the unit constituted a change in use of the unit pursuant to s. 206 of the Excise Tax Act (the “Act”), which deemed the unit to have been sold to and acquired by the appellant on February 25, 2017. Consequently, the Minister of National Revenue assessed the appellant under the Act for HST collectible on the sale, leading to the appeal before the Court.
The question before the Court was whether the sale of the Property was subject to HST, which, pursuant to the Act, is imposed on the recipient of a “taxable supply” that is “made in Canada.” If the sale was subject to tax, it would be levied on the value of the consideration for the supply at the 13% HST rate applicable to supplies made in Ontario.
The Court affirmed that the sale of the Property fell within the Act’s definition of “supply” and that, since it involved real property, it was deemed part of a commercial activity and therefore taxable, unless exempt.
Generally, the sale would be exempt under the Act if the following conditions were satisfied:
The sale of the Property was the sale of a residential complex; and
The appellant was not a builder of the Property.
The Court was satisfied that the appellant did not meet the Act’s definition of a builder. However, with respect to the first condition, the Court determined that the sale did not constitute the sale of a “residential complex,” despite the property being a residential unit. It held that the property fell under the Act’s general exclusion for being considered a “residential complex” due to the following:
At the time of sale, the Property was operated similarly to hospitality establishments like hotels, motels, inns, boarding houses, and lodging houses, as it was being offered for short-term leases on Airbnb on a furnished basis, with the appellant covering the costs of utilities, including heat and electricity.
At the time of sale, all or substantially all the leases for the property were for periods of possession of less than 60 days; and
The Property was not a building or condominium owned by an individual, and therefore, the building it was part of did not meet the criteria pursuant to subsection 123(1)(c) of the Act’s definition of a “residential complex.”
The landlord’s Canadian tax-litigation lawyer argued that the landlord exclusively used the condo unit for long-term leases during 9 of the 11 years of ownership. As a result, they claimed the condo unit met the definition of a “residential complex,” and the sale of the unit qualified as a tax-exempt supply.
The Tax Court rejected this argument, determining that the provisions of Canada’s Excise Tax Act required the Court to assess whether the condo unit met the definition at the time of sale. At that time, the condo unit did not meet the definition because it was being used for short-term Airbnb rentals.
Furthermore, the Tax Court concluded that the landlord was deemed to have acquired the property on February 25, 2017, and that, from that date until it was sold, the landlord only used it to make taxable supplies through short-term leases. At no point during this period was the property a “residential complex,” since substantially all of the leases under which the property was supplied provided for periods of continuous possession of less than 60 days. Therefore, even if the definition of “residential complex” were applied over the entire ownership period, the condo unit still would not meet this definition at the point of sale, and the sale of the condo unit would remain a taxable supply subject to GST/HST.
Conclusion
The income tax and sales tax implications of property rentals can be quite complex, especially when short-term rentals are involved. Property owners need to carefully consider the tax consequences of changing property usage. In the above case, the Minister assessed the appellant C$77,079.64 in GST/HST collectible on the sale of the condominium. To avoid unintended tax consequences, it is essential for landlords and property owners to consult with tax professionals who can provide expert guidance tailored to their unique circumstances.
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Author: Dimitrios Zaravinos, Director, Private Client Individual Tax Services