A recent bombshell ruling by the Tax Court of Canada has the potential of impacting property owners who sell properties that have been rented out on short-term rental platforms like Airbnb. This column will review the ruling and provide some guidance for realtors and owners who have sold or are planning to sell their property that has been used as an Airbnb rental or on similar rental platforms.
In a recent ruling which will have widespread repercussions for short-term rental operators, the Tax Court of Canada ruled that properties that are consistently used for short-term rentals are subject to the 13% Harmonized Sales Tax (HST) when sold. Traditionally, the sale of a residential property in Canada is exempt from HST, but in this case, the court ruled that HST applied to the sale because a property rented on Airbnb is classified as a commercial property, thus making HST applicable on the sale.
The case involved an Ottawa condominium owner who was using the property as a short-term rental via Airbnb for approximately 14 months prior to its sale. The owner did not collect or pay HST at the time of the sale on the mistaken assumption that the sale would be exempt from HST. Following the sale, Canada Revenue Agency (CRA) re-assessed the sale and determined that because the property was consistently being used as a short-term rental, it was a considered to be a commercial property and not a residential one.
The decision applies to all property types including condominiums, townhomes and single-family homes that have been consistently rented on short-term rentals like Airbnb and VRBO. The ruling will obviously have a major impact on property owners who rent their properties on short term rental platforms given the significant tax liability that could follow on the sale of the property. With this ruling and the ever increasing regulations on Airbnb, this could drive property owners away from these platforms altogether.
The interesting issue is how CRA classifies the property as residential or commercial. The court ruled that when is a property is leased out consistently for short term use like a hotel, CRA deems it to be a commercial property. This removes the HST exemption and the sale becomes taxable. Determining whether or not the use of the property is residential or commercial is based on the facts of each case. Therefore, it may be incorrect to assume that owners who sporadically rent out their property on short term rentals will face the same tax liability.
The ruling should serve as a warning to homeowners who should obtain tax advice if the property has been consistently used for short-term rentals and they plan to sell it. Similarly, realtors who are selling these properties on behalf of homeowners should be advising their clients to obtain tax advice before listing or selling the property.