A recent ruling by the Tax Court of Canada indicates homeowners who have regularly rented out their property on Airbnb or other short-term rental sites will be subject to paying 13 per cent HST when putting the home up for sale.
The 13 per cent tax will be applied to the total price paid for the property when sold, so could amount to tens — or even hundreds — of thousands of dollars.
While the sale of a previously occupied residential property is generally exempt from HST, the Tax Court of Canada ruled in March that the sale of a condo unit rented out on Airbnb for a number of short-term leases was subject to the tax.
It’s a ruling that will likely have big implications for short-term rental operators as it clarified that the CRA can charge the tax in cases similar to the ruling.
“People must be absolutely careful if they want to use short-term rental platforms for their property consistently,” said real estate lawyer John Zinati, owner of Zinati Kay law firm in Toronto. “They’ll be taxed a big amount. If they sell their unit for $1 million, they have to pay $130,000 in tax.”
The tax rules apply to any property type, which includes condos, townhomes and single-family homes that have been rented out for short-term rentals on platforms such as Airbnb and VRBO, over a consistent amount of time, said Zinati.
The decision was made in a case where a condo owner in Ottawa sold his home after renting it on Airbnb.
The owner originally rented out the unit on long-term leases of more than 60 days for nine years. However in 2017, the homeowner decided to list his property on Airbnb and leased it for periods of continuous short-term rentals for 14 months prior to the sale.
When he sold the property in April 2018, he didn’t pay HST.
Sometime after closing, the minister of national revenue assessed that the unit changed from residential to commercial use, which meant that HST was collectible upon sale. That means consistent long-term leasing is still considered residential use, but short-term rentals are considered commercial use.
The decision was appealed, but in March of this year the court determined the property when sold wasn’t a “residential complex” as it was operated similarly to a hotel — it was being leased on a short-term basis fully furnished with the homeowner covering the cost of utilities. As a result, the entire sale price of the condominium was not exempt from HST.
“If you rent out your property for a weekend every now and then, you’re not subject to this tax rule,” Zinati said. “It has to be on a consistent basis, and in this case, the homeowner did so for 14 months, which counted.” In the City of Toronto, a short-term rental is all or part of a dwelling unit rented out for less than 28 consecutive days in exchange for payment.
The court ruling doesn’t mark any change in the law but the case may come as a surprise to the public, said Dale Barrett, president and founder of Barrett Tax Law.
“This decision is educating people about the law,” he said. “People are in the dark about HST and don’t understand how the Excise Tax works and how it applies to properties.”
The ruling also picks up on a trend of the Canada Revenue Agency (CRA) pursuing taxation in real estate — the recent capital gains tax and assignment sales tax are indicative of an attempt from the CRA to clamp down on the “leakage” in taxation when dealing with real estate transactions, Zinati added.
Going forward, it’s important for homeowners to know there’s a 90 per cent threshold of renting out the property, which determines if they’ll be subject to HST upon sale, Barret said. While that 90 per cent threshold doesn’t have a clear definition, it could mean that if the property is rented out for short-term use 89 times but rented out 11 times for long-term use then the property wouldn’t be subject to the tax, Barrett said.
“How to calculate that 90 per cent still isn’t clear, but that could be determined in another case,” he added.
“Be careful if you decide to pursue short-term rental,” said Barrett. “And if you decide to sell the home speak with an expert who knows the law well.”
