If you regularly rent out your home on Airbnb or other short-term rental platforms, expect to be hit with a hefty tax when you sell it.
The Tax Court of Canada recently ruled that homeowners who frequently rent their properties as short-term rentals are subject to paying 13% HST when it’s put up for sale.
The tax applies to any residence consistently rented out short-term on sites like Airbnb and Vrbo. This includes condos, townhomes, and single-family homes.
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It would be applied to the home’s total price when sold, meaning homeowners could be taxed tens or hundreds of thousands of dollars.
Residential home sales are usually exempt from HST, so this ruling will affect investment property owners.
“This decision highlights the need for property owners to carefully consider the tax consequences of changing property usage,” reads a post from Ontario law firm Pallett Valo LLP.
“The court’s ruling emphasizes that properties used primarily for short-term rentals, such as those listed on platforms like Airbnb (particularly at the time of a sale to a third-party purchaser), may not qualify for the residential complex exemption and may therefore be subject to HST.”
The decision was made in a case involving a condo owner in Ottawa who sold his home after putting it up for rent on Airbnb.
Between 2008 and 2017, the homeowner leased the condo for long-term rentals that exceeded 60 days.
However, the homeowner then decided to list the condo on Airbnb and rented out the property through a series of short-term leases from 2017 to 2018.
He made $11,200 in 2017 and $43,179 in 2018 through the short-term leases. In April 2018, he sold the residence, which was still a short-term rental on Airbnb, without paying HST.
After the sale was closed, the minister of national revenue assessed that the condo was subject to 13% HST ($77,079.64), which is collectible upon sale, because it changed from residential to commercial use.
This sets the precedent that long-term rentals are still considered residential use, but short-term rentals are considered commercial. It also suggests that if the condo were converted back into residential use before the sale, it probably wouldn’t have been subject to HST.
The court says the Canada Revenue Agency (CRA) can charge the tax in similar cases to the ruling.
An appeal of the decision was dismissed in March because the court didn’t define the condo as a residential complex at the time of sale. Instead, it said the home was “similar premises to a hotel, motel, inn, boarding house or lodging house,” which are commercial properties subject to HST.
The decision is similar to the CRA’s rules surrounding GST/HST when selling vacation properties.
Provinces like BC are cracking down on short-term rentals. In May, BC introduced regulations promising to return thousands of homes to the long-term rental market.