Market Insight for October 25

Homeowners who routinely rent on Airbnb or similar platforms are now required to pay a 13% tax on the property’s value upon sale.

A recent decision by the Tax Court of Canada means that individuals who have consistently rented out their property through Airbnb or other short-term rental sites must pay a 13% HST when they decide to sell. This tax will be levied on the total sale price of the property, potentially resulting in tens or even hundreds of thousands of dollars in taxes.

Typically, selling a previously occupied home is exempt from HST, but in March, the Tax Court ruled that the sale of a condo rented out on Airbnb for short-term leases would be taxed. This ruling could carry significant implications for those operating short-term rentals. “People need to exercise great caution if they plan to use short-term rental platforms frequently,” said John Zinati, a real estate lawyer and the owner of Toronto’s Zinati Kay law firm. “The tax can be substantial. For instance, selling a unit for $1 million would require a $130,000 tax payment.”

The tax applies to all types of properties, including condos, townhomes, and single-family homes rented out as short-term accommodations on platforms like Airbnb and VRBO.

This ruling stemmed from a case involving an Ottawa condo owner who sold his unit after listing it on Airbnb. Originally, he rented the unit out on leases longer than 60 days over nine years. In 2017, he opted to list the unit on Airbnb and rented it out for consecutive short-term periods over 14 months prior to the sale.

When he sold the property in April 2018, he did not pay HST, but the Minister of National Revenue later assessed that the unit’s use had shifted from residential to commercial, making it subject to HST. This ruling established that while consistent long-term rentals retain residential status, short-term rentals qualify as commercial use.

After an appeal, the court ruled in March that the property, when sold, wasn’t a “residential complex” due to being managed like a hotel – rented short-term, fully furnished, and with utilities covered by the owner. As a result, the condo’s sale price was not HST-exempt, meaning the property’s status as an Airbnb made it subject to this tax. This implies that a property converted back to residential use might not incur the 13% HST on sale.

This ruling has brought significant awareness about tax law, especially as many are unaware of how ST and the Excise Tax apply to properties. Additionally, the ruling aligns with a broader trend of Canada Revenue Agency (CRA) efforts to tax real estate, including recent capital gains tax and assignment sale taxes.

Looking ahead, homeowners should be aware of a 90% rental threshold that may determine whether they owe HST upon selling. While there’s no strict definition of the 90% threshold, it may mean that if a property is rented short-term 89% of the time but rented long-term 11% of the time, the property may avoid the tax.

Further details on the GST/HST for vacation property sales are available on the CRA website.