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Over the years, many of our clients have enjoyed the benefits of turning their properties into Airbnb rentals instead of opting for traditional long-term leases. Airbnb has offered a unique combination of reduced landlord risks and significantly higher monthly income, making it a no-brainer for property owners. However, after considering the possible HST Implications of STRs, it may be worth reevaluating whether Airbnb is still the golden ticket it once was.
CRA Rules on Short-Term Rental (STR) Sales: What Do Airbnb Hosts Need to Know?
Have you considered selling your short-term rental property but are unsure about the tax implications? A recent tax court case provides clarity on the tax rules for short-term rental sales, directly impacting platforms like Airbnb. This blog post will unpack the latest CRA guidelines and explain how the Tax Court of Canada has clarified that sales of properties used primarily for short-term rentals may be subject to Harmonized Sales Tax (HST).
Understanding CRA’s Tax Rule Change on Short-Term Rentals
The CRA has held the position that STRs are treated as commercial properties and not residential rentals. This classification means that individuals who have used their properties for short-term rentals, such as Airbnb, may be subject to GST/HST when selling. Traditionally, sales of residential properties are exempt from these taxes, but a recent court ruling emphasized that properties used primarily for short-term rentals do not qualify for this exemption as they are commercial properties. As a result, owners looking to sell must consider whether their usage of the property as a short-term rental could render the sale taxable.
Tax Court of Canada’s Recent Ruling
A recent Tax Court of Canada case, 1351231 Ontario Inc. v. The King (2024), serves as a critical example of this. In this case, the property owner initially rented a condominium for long-term leases but later listed it on Airbnb for short-term rentals. When the owner decided to sell, the CRA argued that the property should be taxed because its primary use had shifted to short-term leasing, which the court viewed as a commercial activity. The ruling ultimately concluded that the property sale was subject to HST, a decision that could set a precedent for similar cases.
Impact of Property Usage on GST/HST Obligations
The court’s ruling underscores how the purpose and duration of property leases can affect tax obligations under the CRA’s guidelines. Short-term rental use is considered “commercial activity” by the CRA, meaning that properties primarily rented for terms of less than 60 days are viewed as commercial operations similar to hotels or motels. This change in classification can make the property sale taxable, even if it was initially a residential dwelling. Owners who decide to transition their properties from long-term residential leases to short-term rentals may find themselves liable for GST/HST when selling.
Exemptions: Does Your Property Qualify?
One of the most significant points under CRA rules is whether a property qualifies for tax exemption as a residential complex. Generally, the sale of a residential property that has been used for long-term living arrangements (exceeding 60 days) is exempt from GST/HST. However, properties that function as short-term rentals on platforms like Airbnb do not meet the criteria for this exemption, as they operate similarly to hospitality businesses. This difference in usage means that, in many cases, properties used mainly for short-term rental activities are not exempt and will be subject to tax when sold.
The only other exemption to this rule is if the property sold was used over 50% for personal use.
The “Change-in-Use” Rule
One of the CRA’s essential guidelines, known as the “change-in-use” rule, applies when a property initially intended for residential purposes transitions into a commercial, short-term rental. Under Section 206(2) of the Excise Tax Act, if a property’s usage changes substantially, it is deemed to have undergone a ‘supply by sale’ for tax purposes. In the recent case, the property’s transition from long-term leases to short-term Airbnb rentals triggered this rule, leading the court to classify it as a commercial property and apply GST/HST to the sale. Property owners who switch to short-term rental arrangements should be aware of this potential tax liability if they plan to sell. This may mean homeowners who transition a property from Airbnb to a long-term rental may need to self-assess themselves for GST/HST.
Calculating Commercial Use Proportion: A Taxpayer’s Example
In the recent court case, the taxpayer argued that the property was used for short-term rentals only a small portion of the total ownership period, suggesting that this minor use should not subject the entire sale to GST/HST. However, the court determined that tax obligations apply based on the nature of use at specific points in time, not the overall proportion. Since the property was used for short-term rentals consistently in the period leading up to the sale, the court deemed the change in use as substantial. Consequently, the entire property sale was considered a taxable event.
Impact on Sellers: Key Takeaways for Property Owners
This ruling serves as a reminder for property owners to be cautious about how their properties are used, especially when transitioning between long-term and short-term rentals. If a property has been used mainly for short-term rental, it may be deemed commercial and subject to GST/HST upon sale. Property owners may want to consult a tax professional to assess potential GST/HST liabilities before making any sale decisions.
Is Short-Term Rental Still Profitable Despite New Taxes?
With these tax rules, Canadian property owners may question the profitability of short-term rentals. While platforms like Airbnb can be lucrative, the tax implications could reduce net earnings, especially when selling the property. For those planning to stay in the short-term rental market, understanding the full spectrum of tax liabilities will be essential for calculating net income accurately. Despite the added tax burden, short-term rentals may still remain profitable, but careful planning is necessary to optimize returns.
FAQs
What triggers GST/HST on the sale of a short-term rental property?
The CRA considers a property used primarily for short-term rentals, like Airbnb, as a commercial property subject to GST/HST. The shift from long-term to short-term usage can trigger a taxable status at the point of sale.
Are all Airbnb properties subject to tax on sale?
No, not all are automatically subject to tax. Properties primarily used for long-term leases or personal use may still qualify for tax exemptions. However, if short-term use dominates, the sale may be subject to GST/HST.
Can I avoid GST/HST if I switch from Airbnb back to long-term leases before selling?
Switching back to long-term leases might change the tax status, but it depends on the usage history and CRA guidelines. Consulting a tax professional is recommended to clarify potential obligations.
How does the change-in-use rule affect my tax obligations?
The change-in-use rule applies when a property initially intended for residential purposes is used as a commercial rental. The rule can deem the sale taxable under CRA guidelines, making the entire property subject to GST/HST.
Should I consult a tax expert before selling my Airbnb property?
Yes, a tax expert can provide specific guidance based on CRA rules and your property’s usage. They can help ensure compliance, avoid unexpected taxes, and structure transactions to minimize tax liabilities.
Relevant ITA & Case Citations (Cross References included)
Excise Tax Act - Section 206(2): This section addresses the "change-in-use" rule. It states that if a property’s usage shifts from a residential purpose to a commercial one, the property is deemed to undergo a "supply by sale" for tax purposes. This rule is particularly relevant for properties transitioning from long-term rentals to short-term rentals on platforms like Airbnb, as it can trigger GST/HST on the sale if the primary use shifts to short-term rentals.
Case Reference -1351231 Ontario Inc. v. The King (2024): In this case, the Tax Court ruled that a property’s primary use as a short-term rental classified it as a commercial property subject to HST upon sale. The owner’s attempt to argue minimal short-term rental usage proportionally was not upheld, emphasizing that short-term rental use, regardless of the overall ownership period, can significantly impact the property’s tax status at sale. This case sets a precedent for how the CRA may assess properties used for short-term rentals, particularly regarding GST/HST obligations.
Income Tax Act - Section 45(1): Change in Use of Property: Section 45(1) applies when a taxpayer changes the use of a property from personal or residential to commercial use. This section mandates a deemed disposition at fair market value, potentially creating a capital gain or triggering GST/HST if deemed a commercial supply. This provision can be significant when determining the property's tax treatment if initially acquired for residential purposes and later repurposed for short-term rental.
Excise Tax Act - Section 123(1): Definitions of Commercial Activity: Section 123(1) of the ETA defines "commercial activity" broadly, including any business or venture carried on with a reasonable expectation of profit. Short-term rentals under platforms like Airbnb often fall into this category, particularly if rented for periods under 60 days, aligning the activity with commercial classification and impacting GST/HST upon sale.
Contact Us
Navigating the intricacies of CRA tax laws, especially with changes affecting short-term rentals, can be challenging. Consulting with a tax professional experienced in real estate transactions can provide insights into potential tax obligations and strategies for minimizing them. A tax expert can guide property owners through the complexities of CRA rules, assess specific cases under the change-in-use rule, and ensure full compliance with Canadian tax laws. Please contact us if you or anyone you know needs a consultation in this area.
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