Selling your Airbnb: GST Consequences to Consider

Written by Jonathan Coombs, Kamal Elmahdi and Sherry Simons

Navigating the complexities of GST can be particularly challenging for real estate transactions, especially when it comes to the sale of properties used for short-term rentals like those listed on Airbnb. GST is imposed by the Excise Tax Act, RSC 1985, c E-15 (the “Act”). Section 165(1) of the Act imposes GST on any taxable supply made in Canada. There are various exemptions afforded to the sale of real property, but if the property is not GST exempt and there is no agreement for the buyer to remit GST, then the burden will land on the seller to collect and remit GST.

This blog post explores the recent Tax Court of Canada decision in 1351231 Ontario Inc. v. The King, which highlights the significant GST implications for sellers of properties used for short-term rentals like those listed on Airbnb. The court’s analysis determined that the sale of a condo used for short-term rentals is subject to GST, as it does not qualify for the residential complex exemption. This decision underscores the importance for property owners to carefully consider GST rules when selling properties used for short-term rentals to avoid unexpected tax liabilities. Ultimately, understanding these nuances can help sellers better prepare and potentially save significant amounts in taxes.

Recent Case Decision - 1351231 Ontario Inc. v. The King

The Tax Court of Canada (“TCC”) in its recent decision 1351231 Ontario Inc. v. The King, 2024 TCC 37 upheld the Canada Revenue Agency’s (“CRA’s”) GST/HST assessment of over $77,000.00 on the sale of a condo unit. The decision stemmed from the seller’s use of the condo for short-term rentals through the Airbnb platform prior to the sale.

The condo unit in question, located in Ottawa, Ontario, was originally purchased by the corporate owner/seller in 2008 and was rented through a series of long-term leases until February of 2017. From February 2017 until it was sold in April 2018, the seller listed the condo unit on Airbnb and leased it for a series of short-term leases. The Airbnb leases were all less than 60 days and many just one or two days in length. The issue before the Court was whether the sale of the condo unit was subject to GST.

In the first part of its analysis, the Court held that the sale of the condo unit was a supply under the Act since “supply” includes the provision of property or a service in any manner, including sale. However, being a supply does not mean it is a taxable supply. The Act defines a taxable supply as one made during commercial activity. The Court looked at the detailed definition of commercial activity and decided that since the sellers sold real property, this transaction counts as commercial activity. Therefore, the condo is a taxable supply subject to GST unless an exemption applies.

In the second part of its analysis, the Court examined various exemptions in the Act with respect to the sale of real estate. Under the Act, an exemption would apply in this case if (para 20):

1. the sale of the condo was the sale of a residential complex;
2. the Appellant was not a builder of the condo; and
3. the Appellant did not claim an input tax credit in respect of its acquisition of or improvements to the condo.

The sellers were not the builders, and there was no evidence that the sellers claimed any input tax credits. Therefore, the condo sale would be GST exempt if it was a sale of a residential complex.

The Court considered the definition of “residential complex” in the Act and the exclusions that disqualify properties from being residential complexes. An exclusion applies if the following criteria are satisfied (para 31):

• The condo is part of a building that functions like a hotel, motel, inn, boarding house, lodging house, or similar place;
• The building in which the condo is located does not fall under the specific exclusions mentioned in paragraph (c) of the definition; and
• Practically all of the leases, licences, or similar agreements for the condo were for periods of less than 60 days, or were expected to be for such short periods.

The second criterion applies only to individual owners and not corporate owners and did not apply in this case because the owner was a corporation.

The Court found that the first criterion was met. While the condo unit was on Airbnb (which was the case up until it was sold), it was provided for a fee as a short-term accommodation, it was furnished, and included heat, electricity, air conditioning, Wi-Fi, and perhaps other amenities. The Court decided that a condo unit leased this way is similar to a hotel, motel, an inn, a boarding house, or a lodging house (paras 81-82).

For the last criterion, the Court found that the condo unit had long-term leases of over 60 days for about nine years. It was only leased on Airbnb for periods less than 60 days in the final year of ownership. However, the Court emphasized that the determination is made at the time the condo unit was sold and not based on the duration of ownership (paras 90-94). When the condo unit was sold, all the leases were or were expected to be for periods less than 60 days.

Overall, the Court found that the exclusion criteria applied to this case and that the condo unit is not considered a residential complex. Because of this, an exemption does not apply, and the sale of the condo unit is a taxable supply subject to GST.

Implications

The broader implication from this decision is that using your property as a short-term rental through Airbnb, or other similar platforms, is likely to cause the sale transaction to be subject to GST. Additionally, the Real Estate Council of Alberta’s standard contract used by realtors in Alberta, as well as many other standard real estate agreements, express the purchase price as a total amount that includes any GST. Therefore, an unsuspecting seller could be agreeing to sell their property for significantly less than anticipated if they have not determined and accounted for GST.

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GST rules are complicated, and the foregoing is not a comprehensive review of the real estate provisions of the Act. Our real estate lawyers are ready to assist you, including with respect to GST consideration – contact us today. Learn more about Witten’s Real Estate practice and our exceptional team on our website.