Change in Real Property Use: Airbnb Rental Property Subject to GST/HST

In 1351231 Ontario Inc. v. His Majesty the King (2024 TCC 37), the question before the Tax Court of Canada (the “Court”) was whether the sale of a condominium unit was subject to GST/HST under the Excise Tax Act (Canada) (the “Act”). The Court concluded that the condominium unit’s “use” had changed to short-term Airbnb leases and therefore was subject to GST/HST.

The Facts and Issue

The Appellant, 1351231 Ontario Inc., had initially purchased the used residential condominium unit for residential rental activities in February 2008. For the first nine years, the Appellant leased the condominium unit to third-party individuals through long-term leases (i.e., periods exceeding 60 days) and thus, it was exempt from GST/HST. However, beginning in February 2017, the property was rented out through a series of short-term leases on the Airbnb platform. The Appellant sold the property in 2018, and neither the purchaser nor the Appellant remitted GST/HST regarding the sale of the condominium.

The main issue for the Court was whether the sale of the condominium unit was subject to GST/HST under Division II of the Act or was exempt from GST/HST under Schedule V of the Act. For the sale of the condominium unit to be exempt under section 2 of Part I of Schedule V of the Act, it would have to satisfy the definition of a “residential complex” under subsection 123(1) of the Act.

Analysis

“Residential Complex”

The sale of a used residential complex is generally exempt from GST/HST under section 2 of Part I of Schedule V of the Act if certain requirements are met. The Court reviewed Schedule V and subsection 123(1) of the Act for supplies of real property and considered whether the Appellant’s condominium unit qualified for the “residential complex” exemption. The definition of residential complex carves out real property that is “a building or that part of a building, that is a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises … and all or substantially all of the leases, licenses or similar arrangements, under which residential units in the building or part are supplied, provide, or are expected to provide, for periods of continuous possession or use of less than sixty days.” [Emphasis added.]

The Appellant argued that the condominium unit is not excluded from the exemption because the condominium is not a hotel, motel or other similar premises. The Court disagreed with the Appellant’s argument and concluded that at the time of sale, the condominium was offering short-term leases on the Airbnb platform that acted similarly to a hotel, motel, inn, boarding house or lodging house, by regularly supplying accommodations to third parties for short-term periods of less than 60 days.

Change in Use

The Court also considered the change-in-use rules for real property contained in subsection 206(2) of the Act, noting their importance in determining whether the above-mentioned carve-out in the definition of “residential complex” applied to the condominium unit. Subsection 206(2) of the Act provides where a registrant (i.e., a person registered for GST/HST) begins to use real property previously acquired for use in non-commercial activities, at a particular time, for use in its commercial activities, then at that time the registrant is deemed to have received a supply of the real property by way of sale when it begins to use the real property in its commercial activities. The Court concluded that the Appellant began to use the condominium unit in commercial activities on the date it listed the unit on the Airbnb platform for short -term leases and, therefore, the change-in-use rules were triggered on that date.

The Appellant argued that section 197 of the Act applied, which limits subsection 206(2) of the Act to situations where the change in use is 10% or more of the total use of the property. The Appellant contended that between the time the condominium unit was purchased in 2008 to when it was sold in 2018, the Appellant supplied the condominium unit by way of taxable short-term leases for 366 days, meaning the condominium unit was used only 9.9% of the time for commercial activities out of the total 3,694 days the Appellant owned the condominium unit. However, the Court held that the change-in-use rules apply at the particular time that changes in use occur. As such, the Court determined that section 197 of the Act did not apply in the circumstances because the change in use, starting on the date the property was used to make short-term rentals (i.e., the particular time), was 100%.

Conclusion and Key Takeaway

The Court determined that the Appellant used the condominium unit in 100% commercial activities when it listed the condominium unit on the Airbnb platform fourteen months before the sale of the condominium unit. The condominium unit could not be exempted as a residential complex under subsection 123(1) of the Act since all or substantially all of the leases the condominium unit supplied during that fourteen-month period, were for lease periods of less than 60 days. Therefore, the sale of the condominium unit constituted a taxable supply of real property.

A residential unit listed on an online short-term rental platform such as Airbnb, has been found similar to a hotel, motel or similar premises which is not exempt from GST/HST on its sale. Property owners should be weary when selling their residential real property about relying on the “residential complex” exemption for GST/HST purposes as the supply of property is determined at the time of sale, not throughout the duration of ownership.

The authors note that this decision is currently under appeal to the Federal Court of Appeal. Readers should be aware that the decision may be subject to change, which could impact how similar cases are assessed.

If you have any questions about this content, please contact the authors Paul De Francesca at [email protected] or Sam Fata at [email protected]. The authors gratefully acknowledge the assistance of Lawyer in Training Mila Simic in the preparation of this update.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.