Tax Court of Canada Rules Airbnb Rental Sales Subject to GST/HST: Implications for Investment Property Owners

• 
  Zoe Rajwani
  Lawyer

Earlier this year the Tax Court of Canada released a decision where the sale of an investment property that was rented out using Airbnb, was subject to GST/HST.  

Even though the property had mostly been used to make long-term residential leases, the Court found that the use of the property is determined at the point of time of the sale – in this case, making short-term leases through Airbnb. 

To learn more, please see a summary below of 1351231 Ontario Inc. v The King, 2024 TCC 37. 

Brief Facts

The Appellant corporation purchased a used condominium unit in Ontario (the “Condominium”) as an investment property in February 2008.  

For 9 years, from Feb 2008 to Feb 2017, the Appellant made back-to-back long term leases to third-party individuals (i.e. each lease was longer than 60 days).  

Beginning on February 25, 2017, the Appellant listed the Condominium on Airbnb, and made short-term leases to third-party individuals (i.e. each lease was less than 60 days) until April 2018. 

The Appellant listed the Condominium for sale on December 12, 2017. The sale closed on April 11, 2018. 

The Minister assessed the Appellant $77,079.64 as GST/HST collectable on the sale of the Condominium. 

Issue

The question before the Court was whether the sale of the Condominium was a taxable supply subject to GST under section 165 of the Excise Tax Act (the “Act”). 

Brief Answer

The Court found that the sale of the condo was subject to GST/HST because it was not a “residential complex” at the time of the sale, and thus a taxable supply of real property. 

Analysis

The Court began its analysis with section 165. Subsection 165(1) imposes tax on the recipient of a taxable supply that is made in Canada, and subsection 165(2) increases the rate of tax if the taxable supply is made in a participating province (which includes Ontario). 

The sale of the Condominium is a “supply” because it meets the definition, per subsection 123(1) of a provision of property of service in any manner, including sale. 

Further, the Condominium is situated in Ontario, thus the sale was made in Canada and made in a participating province. 

The last piece to determine if section 165 applies is whether the sale was a taxable supply. 

Per subsection 123(1), a “taxable supply” is a supply made during the course of a commercial activity.  

Per subsection 123(1),  the definition of “commercial activity” includes “the making of a supply (other than an exempt supply) by the person of real property of the person…”. 

This means that, per subsection 123(1), the Appellant’s sale of the Condominium meets the definition of a taxable supply, unless it is an exempt supply. 

Was the Condominium an exempt supply? 

The relevant provision for exempt supplies of real property are set out in section 2 of Part I of Schedule V to the Act. Three conditions need to be met to be an exempt supply: 

• The Appellant was not a builder of the Condominium; 

• The Appellant did not claim an input tax credit in respect of the purchase of or in respect of improvements to the Condominium; and, 

• The sale of the Condominium was the sale of a residential complex. 

The Court found the Appellant was not a “builder” (as defined under subsection 123(1) of the Act) and that input tax credits had not been claimed with respect to the purchase of or improvements to the Condominium.  

The remaining issue was whether there was a sale of a “residential complex” (as defined under subsection 123(1) of the Act). 

Was the Condominium a Residential Complex at the Time of the Sale?  

When the Appellant initially bought the Condominium in 2008, it was to make long-term residential leases. If this was the only kind of lease the Appellant was making at the time of the sale, the Condominium would not have been subject to GST/HST. 

The issue arises in 2017 because the Appellant began to list the Condominium on Airbnb until a few months before the Condominium sale closed.  

Typically a residential unit, such as the Condominium, is considered a residential complex, unless the exclusion in the definition of a “residential complex” (from subsection 123(1) of the Act) applies. 

The Court found that the exception is met in this case because a residential complex does not include a residential unit that is a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises, where all or substantially all of the leases, under which the residential unit were supplied for periods of continuous possession or use of less than 60 days. 

The Court found that at the time the Condominium was sold, the above exception applied. This is because, collectively, these short-term accommodations are normally furnished accommodations, supplied with heat and electricity, provided to third parties on a short-term basis for a fee. These features applied to the Condominium while it was listed on Airbnb. 

Appeal Dismissed   

The Court found the Condominium was not a residential complex at the time of sale, which meant the sale of the Condominium was not an exempt supply, and was therefore a taxable supply of real property. 

Note: Change-in-Use Rules   

While not directly relevant to the Court’s finding that the sale was a taxable supply of real property, importantly the Court noted that the change-in-use rules under subsection 206(2) of the Act apply.  

The change-in-use rules became relevant because the Appellant was a GST registrant when it purchased the Condominium, and maintained that status throughout the relevant period. 

Further, the change-in-use rules applied because the Appellant was deemed under subsection 206(2), to have repurchased the Condominium at the point in time that the Condominium went from being used in making exempt supplies (i.e. long-term residential leases) to taxable supplies through commercial activities (i.e. making short-term leases through Airbnb).  

The date the change-in-use occurred was the date the Appellant listed the Condominium on Airbnb i.e. February 25, 2017. A consequence of the deemed “repurchase” is that tax is deemed to be paid equal to the basic tax content on the date the change occurs. In this case, the basic tax content of the Condominium was zero. 

Conclusion

If you are unsure of your tax obligations arising from a change-in-use or sale of your property, contact the Tax group at McKenzie Lake Lawyers for assistance. 

This article was written by Tax Litigation Lawyer, Zoe Rajwani. For additional information, please do not hesitate to contact her at zoe.rajwani@mckenzielake.com.

If you require assistance with any tax law or litigation matter, speak to a Tax Lawyer at McKenzie Lake Lawyers LLP by calling 519-672-5666.