Tax On Short Term Rentals: Sale Of AirBNB Condo Rental Deemed Subject To HST

The rapid conversion of residential properties, including houses and condominiums, into short-term rentals on platforms like Airbnb has significantly reshaped urban landscapes. This trend reflects a growing demand for flexible lodging options and offers property owners lucrative opportunities for rental income. However, the swift transition of these properties from traditional residential uses to transient accommodations brings with it complex tax implications and regulatory challenges.

Although the sale of a previously occupied residential property is typically exempt from HST, the Tax Court of Canada (the "Court") in 1351231 Ontario Inc. v. The King, 2024 TCC 37¹, recently determined that the sale of a used condominium unit, which had been rented out on Airbnb through a series of short-term leases, was subject to HST.

Background²

The Appellant ("1351231 Ontario Inc."), registered for GST purposes under Part IX of the Excise Tax Act, RSC 1985, C. E-15 (the "GST Act"), is an annual filer with a reporting period ending on May 31 of each year. David and Dean Ross, who are the only shareholders and directors of the Appellant, equally own 1351231 Ontario Inc. On February 29, 2008, the Appellant purchased a used condominium unit located at 2204-179 George Street, Ottawa (the "Condominium").

Between February 2008 and February 2017, the Appellant leased the Condominium to tenants under a series of long-term leases, each exceeding 60 days, with the last lease expiring in February 2017. From February 25, 2017, to April 2018, the Appellant listed the Condominium on Airbnb and rented it out through a series of short-term leases, generating gross revenue of $11,200 in 2017 and $43,179 in 2018. The final Airbnb reservation ended on February 26, 2018.

On December 12, 2017, the Appellant listed the Condominium for sale, and on January 24, 2018, entered into a purchase agreement with MLJFS Holdings, an arm's-length purchaser. The sale closed on April 11, 2018. Neither the Appellant nor the purchaser remitted GST on the sale. However, during the assessment of the Appellant's annual GST reporting period from June 1, 2017, to May 31, 2018, the Minister assessed $77,079.64 as GST/HST collectible on the sale of the Condominium. This assessment led to the appeal before the Court.

Issues the Court Must Resolve

The issue before the Court was whether the sale of the Condominium was liable for HST. According to the GST Act, HST is imposed on the recipient of a "taxable supply" that is "made in Canada."³

• A "supply" is defined as "the provision of property or a service in any manner, including sale,"⁴
• A "taxable supply" refers to a "supply made in the course of a commercial activity."⁵
• A commercial activity encompasses "the making of a supply (excluding exempt supplies) by the person of their own real property, including any related actions taken by the person."⁶

If the sale were subject to tax, it would be charged at the 13% HST rate applicable to supplies in Ontario, based on the value of the consideration for the supply.

Analysis by the Court

The Court confirmed that the sale of the Condominium met the GST Act's definition of "supply" and, since it involved real property, was considered part of a commercial activity and thus taxable unless exempt. Typically, the sale would be exempt under the GST Act if:

1. The sale of the Condominium was classified as the sale of a residential complex; and
2. The Appellant is not considered a builder of the Condominium.

The Court found that the Appellant did not qualify as a builder under the GST Act's definition. However, regarding the first condition, the Court concluded that the sale did not qualify as the sale of a "residential complex," even though the Condominium was a residential unit. The Court determined that the Condominium fell under the GST Act's general exclusion from the definition of "residential complex" for the following reasons:

1. At the time of sale, the Condominium operated similarly to hospitality establishments like hotels, motels, inns, boarding houses, and lodging houses. It was being rented out on Airbnb for short-term stays, furnished, with the Appellant covering utilities such as heat and electricity.
2. The Condominium's leases were predominantly for periods of less than 60 days.
3. The Condominium was not a building or condominium owned by an individual, so it did not meet the criteria of a "residential complex" under subsection 123(1)(c) of the GST Act.

Note: Change-in-use Rules

The Court also examined the change-in-use rules specified in subsection 206(2) of the GST Act, which are crucial for determining whether the Condominium meets the exclusion criteria for a "residential complex." This subsection states that if an HST registrant initially acquires real property not for use as capital property in their commercial activities but later uses it as such, the registrant is deemed to have received a supply of the property at that time, subject to tax unless exempt.⁷

The Court found subsection 206(2) applicable to the Condominium because:

1. the Appellant was an HST registrant when it acquired the Property and maintained this status throughout the relevant period;
2. the Condominium was acquired in February 2008 for long-term residential leases exceeding 60 days (considered exempt under the Act); and
3. the Appellant began using the Condominium for short-term leases on February 5, 2017.

Thus, the Appellant was deemed to have received a supply of the Condominium on February 25, 2017, subject to tax. The Appellant argued that Section 197 of the GST Act should apply, which limits subsection 206(2) to situations where the change in use is 10% or more. The Appellant claimed that between the acquisition of the Condominium in 2008 and its sale in 2018, it was used for taxable short-term leases for only 366 days, which constitutes 9.9% of the time. However, the Court ruled that the change-in-use rules apply at specific points of change in use, and it is at these points that a supply is deemed to occur. Therefore, Section 197 was not applicable as the change in use was 100% from the acquisition date to the date the Condominium was listed on Airbnb.

Conclusion

The Court determined that the Appellant was deemed to have acquired the Condominium on February 25, 2017. From that date until the sale, the Condominium was used only for taxable short-term leases, and during this period, it did not qualify as a "residential complex" since most leases were for periods of less than 60 days.⁸ Consequently, the sale was not exempt and was classified as a taxable supply of real property.⁹

This decision underscores the importance for property owners to carefully assess the tax implications of altering property use. The Court's ruling highlights that properties primarily used for short-term rentals, such as those listed on platforms like Airbnb—especially at the time of sale to a third-party buyer—may not qualify for the residential complex exemption and could therefore be subject to HST. Additionally, the decision stresses the necessity for purchasers to obtain a certificate from the seller under section 194 of the Act, confirming that the sale is exempt from tax under the Act.

Footnotes

1 1351231 Ontario Inc. v. The King, 2024 TCC 37 (CanLII), <https://canlii.ca/t/k3hr2>