Exploring HST Implications on the Sale of Short-Term Rentals

Introduction

As the real estate market evolves and new income opportunities emerge, understanding the tax implications of switching property use has become crucial. Switching your property to be used for short-term rentals, like Airbnb, might seem like a valuable business opportunity, but it carries significant financial risks. Before taking this avenue, it is important to understand Canada’s GST/HST laws and how they apply to your property. Owners who use properties for short-term rentals must be aware of the tax liabilities they may face upon the sale of their property. Failure to consider these implications could lead to unexpected tax liabilities. This article explores how these tax regulations might affect you as a property owner.

When Does GST/HST Apply to Your Property Sale?

Typically, selling a used residential property in Canada is exempt from GST/HST taxes even when it is used as a long-term rental. GST (Goods and Services Tax) and HST (Harmonized Sales Tax) are consumption taxes levied on most goods and services in Canada. Owners of rental properties must understand how these taxes apply, particularly when properties are used for short-term rentals.

If a property has been used to generate taxable income, as a hotel, motel, AirBnb, or other short-term rentals, the sale may suddenly become subject to GST/HST. This can be a costly surprise for landlords. HST applies if:

• you rent out your property for less than 28 consecutive days or if you regularly use the property for short-term rentals
• More than 90% of the property’s usage is for short-term rentals

In these cases, your property might be treated as a commercial asset, which could result in HST being charged when you sell the property. If a property owner transitions from offering long-term rentals to short-term stays (e.g., listing a property on platforms like Airbnb), the GST/HST change-in-use rule found in subsection 206(2) of Canada’s Excise Tax Act applies.

Change-in-Use Rule – subsection 206(2) of Canada’s Excise Tax Act

This rule states that when a property’s use changes to a taxable purpose, which means from long-term rental or residential to short-term rental, the owner is deemed to have “repurchased” the property at its current value. 

What Qualifies as Change in Use?

• Listing a long-term rental property on a short-term rental platform.
• Using a previously exempt property for activities generating taxable income.

If you decide to switch a property’s use from primarily long-term rental use to short-term rental use, you will inadvertently trigger GST/HST liability on the ‘deemed value’ upon sale. 

This triggering of this tax liability was demonstrated clearly in the recent case of 1351231 Ontario Inc. v. The King (2024).

 Case Study: 1351231 Ontario Inc. v. The King (2024)

A recent ruling from August 2024 clarifies that short-term rental activities can change the tax treatment of a property from exempt to taxable under Subsection 206(2) of the Excise Tax Act. 

The case of 1351231 Ontario Inc. v. The King provides an eye-opening example. Here’s what happened:

• A landlord purchased a used condo in Ottawa and rented it out long-term for nine years, during which the income was GST/HST exempt.
• In year 10, the property was listed on Airbnb, resulting in a switch to taxable short-term rentals.
• In year 11, the landlord sold the condo, assuming the sale was exempt from GST/HST based on its extensive long-term rental history.
• Neither the landlord or the purchaser set aside HST in connection with the closing
• The Canada Revenue Agency assessed the landlord for collectible HST on the sale of the property leading to an appeal to the Tax Court of Canada.

The Final Outcome?

The CRA reassessed the sale as taxable, imposing $80,000 in GST/HST as there was a change of use under section 206 of the Excise Tax Act. The Tax Court upheld this decision, noting that the property’s use for short-term rentals, even briefly, disqualified it from GST/HST exemption at the point of sale.

Key Takeaways from this Case

This case clarifies several points for us on the topic of HST on sales of properties being used for short-term rentals.

1. Timing Matters: The GST/HST status of a property at the time of sale is crucial. The court rejected arguments about considering the property’s entire ownership history. Even if the property is primarily used for short-term rentals only for the years leading up to the sale, it can trigger full HST obligations.

2. Change-in-Use Rule: Even if the property was used primarily for long-term rentals, the switch to short-term rentals triggers a “deemed repurchase”, affecting tax liability at the sale.

3. Impact of Brief Short-Term Use: Even a short period of Airbnb rentals can transform a property’s tax status, leading to unexpected GST/HST liabilities when selling.

4. Residential Complex vs Commercial Asset as per paragraph 123(1)(c) of the Excise Tax Act: Under the Excise Tax Act, a ‘residential complex’ generally refers to a property used primarily for continuous possession or use as a place of residence. However, if more than 90% of the property’s use is for short-term stays (less than 28 days), it is classified as a ‘commercial asset,’ losing its residential complex status.

Pro Tax Tips for Property Owners

1. Plan Your Use Carefully: If you’re thinking about switching from long-term rentals to short-term rentals, be aware of the potential GST/HST liabilities and financial impact.
2. Understand Timing Rules: The CRA assesses whether a property sale is subject to GST/HST based on its use right before the sale. A brief period of short-term rentals can have lasting tax implications.
3. Seek Expert Advice: Because these rules can be complex, consulting with both a skilled real estate lawyer and accountant is a smart move. They can guide you through tax planning, help you manage GST/HST responsibilities, and provide strategies to minimize unexpected tax liabilities.

Conclusion

Selling a property used primarily for short-term rentals in Canada can trigger significant HST implications, and it’s an area where property owners need to tread carefully. Under Canadian tax rules, rental income from short-term stays—defined as less than 28 consecutive days—is taxable. If more than 90% of the property’s use involves short-term rentals, the property may be categorized as a commercial asset. This change in use as per Canada’s Excise Tax Act can make the property’s sale subject to HST, potentially leading to a hefty and unexpected HST liability.

For property owners and real estate investors, these tax implications highlight the need for thorough tax planning and professional legal advice. An experienced real estate lawyer can help you understand how these rules apply to your situation, ensure compliance, and explore opportunities to mitigate tax liabilities. Given the complexities and potential for costly reassessments, proactive tax advice is crucial. Proper planning can make a significant difference in preserving your investment’s profitability and navigating Canada’s real estate market with confidence.

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