Ontario Homeowners Who Regularly Rent on Airbnb to Face 13% Tax when Selling Property, Court Ruling Determines

October 25, 2024 TruthUSA

Property owners in Ontario who often rent out their homes on platforms like Airbnb may now need to pay a 13 percent HST when selling the property, based on a recent court ruling.

Typically, HST does not apply to the sale of a previously occupied residential property, as stated by the Canadian Revenue Agency (CRA). However, in March, the Tax Court of Canada ruled that the sale of a condo unit that had been used for several short-term leases through Airbnb is subject to this tax.

The court’s ruling was based on the argument that properties frequently used for short-term rentals are considered commercial rather than residential. This classification is crucial as it triggers the obligation to pay federal and provincial taxes upon the property’s sale.

In his ruling, Judge Steven K. D’Arcy pointed out that sales of commercial properties are subject to both GST and the rate of tax in the particular province, which totals 13 percent in Ontario.

This means that if an Ontario property owner sells a home for $1 million, they would owe $130,000 in HST. For a $750,000 sale, the tax bill would be $97,500, and for a $2.5 million sale, a $325,000 HST payment would be required.

The requirement applies to any consistent short-term rental use of residential units, including detached houses, semi-detached houses, townhouses, or condominium units. The CRA defines short-term rental as a rental period of less than one month of continuous occupancy.

Property owners in Ontario who occasionally rent out their homes on Airbnb need not worry about facing a 13 percent tax when selling their properties.

For the tax to be applicable, a property must be regularly used for short-term rentals, furnished with utilities included, and operated similar to a hotel, according to Deeded, an online firm specializing in virtual real estate closings.

Deeded mentions that a 90 percent threshold is used to determine if a property will be considered a commercial enterprise and therefore subject to the tax.

Regarding the ruling, the tax court’s decision came in a case involving a condo owner in Ottawa who sold his property after utilizing it as a rental through Airbnb.

The unit had been rented out by the owner under long-term agreements from February 2008 to February 2017. Subsequently, the owner listed the property on Airbnb for short-term rentals before selling it 14 months later.

While the owner did not pay HST at the time of sale in April 2018, the sale was later assessed by the CRA, which determined that the unit had transitioned from residential to commercial use, resulting in a tax bill of $77,079.64 for the seller.

The court upheld the government’s assessment, stating that the property did not qualify as a residential complex but was essentially operated as a hotel at the time of sale.

The ruling demonstrates the significance of property owners being informed about current tax laws when deciding on their property usage, as noted by lawyers from Pallett Valo, a Mississauga law firm specializing in commercial real estate, in a blog post about the case.

“This decision emphasizes the need for property owners to carefully consider the tax implications of changing property usage,” the firm stated. “The ruling underscores that properties primarily used for short-term rentals, such as those listed on platforms like Airbnb (particularly at the time of sale to a third-party purchaser), may not qualify for the residential complex exemption and thus may be subject to HST.”

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