Introduction: Sale of Real Property as a Taxable Supply vs. an Exempt Supply
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, unless it qualifies as an exempt supply, a sale of Canadian real property will typically trigger GST/HST liability for the vendor.
Schedule V of Canada's Excise Tax Act lists a number of "exempt supplies"—that is, supplies that don't result in GST/HST for the recipient and that don't give rise to an input tax credit (ITC) for the supplier. In particular, the first part of Schedule V exempts various real-property sales from GST/HST.
One such exemption applies if the subject property qualifies as a " residential complex" under subsection 123(1) of the Excise Tax Act. A "residential complex" captures pretty much every type of residential-use property (building, condo unit, townhouse, etc.) unless the property is used as "a hotel, motel, inn, boarding house, lodging house, or similar premises" where "all or substantially all" (90 percent or more) of the rentals are for periods of less than 60 days. In other words, a long-term residential rental will typically not attract GST/HST when sold, but if that property was used as a hotel, motel, or for other short-term rentals, then the owner will generally incur GST/HST liability when selling the property.
In 1351231 Ontario Inc. v. The King, 2024 TCC 37, (currently under appeal), the Tax Court of Canada held that a property originally used for long-term rentals but later listed on Airbnb did not qualify as a residential complex, making its sale subject to GST/HST. This decision illustrates why Canadians in the gig economy should seek advice from a knowledgeable Canadian GST/HST tax lawyer about the intricate GST/HST rules in Canada's Excise Tax Act.
This article examines the Tax Court's decision in 1351231 Ontario Inc. It then concludes by offering pro tax tips from our expert Canadian GST/HST lawyers.
1351231 Ontario Inc. v. The King, 2024 TCC 37
1351231 Ontario Inc. v. The King, 2024 TCC 37, involved a non-builder corporation that purchased a used residential condominium unit in 2008.
Over the next nine years, from 2008 to 2016, the corporation rented out the condo unit to several tenants under a series of long-term residential leases. Each lease exceeded 60 days, and the rental income was thus GST/HST-exempt.
In 2017, the corporation listed the condo unit on Airbnb for short-term rentals of less than 60 days each.
In 2018, the corporation sold the condo unit and treated the sale as GST/HST-exempt because, prior to the condo's use as an Airbnb, the condo had been used for nine years as a long-term rental.
The Canada Revenue Agency later audited the corporation for GST/HST, concluded that the condo sale was a taxable supply, and reassessed the corporation for $80,000 in GST/HST on the sale.
The corporation's Canadian tax-litigation lawyer first filed a notice of objection and ultimately filed a notice of appeal, taking the corporation's case to the Tax Court of Canada.
The Tax Court of Canada sided with the Canada Revenue Agency, dismissed the corporation's tax appeal, and upheld the GST/HST reassessment. The condo sale could have been an exempt supply—and thus not subject to GST/HST—if the property had met definition of "residential complex" in subsection 123(1) of Canada's Excise Tax Act. But a property doesn't qualify as a "residential complex" if the premises is used as "a hotel, motel, inn, boarding house, lodging house, or similar premises" where "all or substantially all" (90 percent or more) of the rentals are for periods of less than 60 days. The Tax Court of Canada found that, although the condo wasn't "a hotel, motel, inn, boarding house, [or] lodging house," it was a "similar premises" when it was used for Airbnb short-term rentals. Additionally, the court reasoned that the condo unit's initial 2017 Airbnb rental triggered a change-in-use under subsection 206(2) of the Act. This meant that the condo's subsequent rental use and its final sale were taxable supplies and therefore subject to GST/HST.
Pro Tax Tips – Changes In Use & Resulting GST/HST Implications
The 1351231 Ontario Inc decision underscores the importance of ensuring that you understand the tax implications that may arise when you change the use of a Canadian real property. Even an apparently subtle change in use—such as from a long-term rental to a short-term rental—can lead to unexpected tax traps. In 1351231 Ontario Inc, the taxpayer inadvertently converted an otherwise exempt property into a taxable property by listing it on Airbnb.
All Canadian real-property owners and real-property investors should seek advice from a knowledgeable Canadian GST/HST lawyer. Our expert Canadian GST/HST lawyers can provide tax-planning options, alert you to potential pitfalls in using otherwise exempt properties to earn business income, ensuring that you understand all GST/HST and income-tax considerations, including those about ITC eligibility, GST/HST liability on Airbnb rentals, and the treatment of those rentals and potential capital gains on sales. The CRA actively targets these issues, resulting in tax assessments that often diminish the anticipated economic benefits of such ventures for Canadian homeowners.
FREQUENTLY ASKED QUESTIONS
Is the sale of a Canadian real property subject to GST/HST?
It depends. 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. But Schedule V of Canada's Excise Tax Act lists a number of "exempt supplies"—that is, supplies that don't result in GST/HST for the recipient and that don't give rise to an input tax credit (ITC) for the supplier.
In particular, the first part of Schedule V exempts various real-property sales from GST/HST. For example, one such exemption applies if the subject property qualifies as a "residential complex" under subsection 123(1) of the Excise Tax Act. A "residential complex" captures pretty much every type of residential-use property (building, condo unit, townhouse, etc.) unless the property is used as "a hotel, motel, inn, boarding house, lodging house, or similar premises" where "all or substantially all" (90 percent or more) of the rentals are for periods of less than 60 days. In other words, a long-term residential rental will typically not attract GST/HST when sold, but if that property was used as a hotel, motel, or for other short-term rentals, then the owner will generally incur GST/HST liability when selling the property.
For advice on GST/HST obligations relating to real-property transactions, consult with one of our skillful Canadian GST/HST lawyers today.
I own some real estate in Canada. It's currently a personal-use residential property, but I want to start using it as an Airbnb. What do I need to know?
The GST/HST rules in Canada's Excise Tax Act are extremely complicated—especially those concerning real-property transactions. If you own a Canadian real property that you plan on selling or using for a different purpose, seek advice from a competent Canadian GST/HST lawyer.
For example, in 1351231 Ontario Inc. v. The King, 2024 TCC 37, the CRA hit a taxpayer with an $80,000 GST/HST bill because the taxpayer inadvertently converted an otherwise exempt property into a taxable property by listing it on Airbnb. This case underscores the importance of ensuring that you understand the tax implications that may arise when you change the use of a Canadian real property. Even an apparently subtle change in use—such as from a long-term rental to a short-term rental—can lead to unexpected tax traps.
Our experienced Canadian GST/HST lawyers can provide tax-planning options, alert you to potential pitfalls in using otherwise exempt properties to earn business income, ensuring that you understand all GST/HST and income-tax considerations, including those about ITC eligibility, GST/HST liability on Airbnb rentals, and the treatment of those rentals and potential capital gains on sales. Schedule a consultation today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.