Ontario Homeowners Renting Regularly on Airbnb Face 13% Tax When Property Is Sold: Court Ruling

A for sale is sign is displayed in front of a house in the Riverdale area of Toronto on Sept. 29, 2021. The Canadian Press/Evan Buhler

Ontario property owners who regularly rent out their homes on platforms like Airbnb could be required to pay 13 percent HST when selling the property, according to a recent court ruling.

The harmonized sales tax (HST) does not usually apply to the sale of a residential property that was previously occupied, according to the Canadian Revenue Agency (CRA). But the Tax Court of Canada ruled in March that the sale of a condo unit that was rented out on Airbnb for several short-term leases was indeed subject to the tax.

Properties regularly used as short-term rentals are actually functioning as commercial properties rather than as residential ones, the court ruled. The differentiation between commercial and residential is critical because it activates the obligation to pay federal and provincial tax upon the sale of the property.

Judge Steven K. D'Arcy noted in his ruling that commercial property sales are subject to both GST as well the rate of tax in the “participating province.” The combined rate in Ontario is 13 percent.

That means if a property owner in Ontario were to sell a home for $1 million, they would have to pay $130,000 in HST at the time of sale. A home sold for $750,000 would come with a $97,500 tax bill while a $2.5 million sale would require a $325,000 HST payment.

The rule applies to any ongoing short-term rental use of residential units including detached houses, semi-detached houses, townhouses, or condominium units. Short-term rental refers to a rental period of less than one month of continuous occupancy, the CRA said.

Ontario home owners who are only occasional Airbnb hosts don’t need to worry about being slapped with a 13 percent tax if they decide to sell their properties.

For the tax to be applied, a property must be used on a regular basis for short-term rentals. The property must also be furnished with utilities included and be operated like a hotel, according to Deeded, an online firm specializing in virtual real estate closings.

A 90 percent threshold is used to determine if a property will be deemed a commercial enterprise and, therefore, subject to the tax, Deeded said in a blog post.

“While the exact calculation method isn’t yet crystal clear, this benchmark helps determine whether your property will be subject to HST upon sale,” the company said. “If your property crosses this threshold of short-term versus long-term rental usage, you could be facing the full HST implications.”

The Ruling

The tax court’s ruling was rendered in a case involving a condo owner in Ottawa who sold his property after using it as a rental on Airbnb.

The unit was rented by the owner under long-term agreements between February 2008 and February 2017. The owner then decided to list his property on Airbnb for short-term rentals before selling the property 14 months later, court documents show.

The owner didn’t pay HST when he sold the property in April 2018 but the sale was later assessed by the CRA. The agency determined that the unit had changed from residential to commercial use and billed the seller $77,079.64 in taxes.

The seller appealed the assessment, but the court sided with the government, saying the property wasn’t a “residential complex” but rather was operated similarly to a hotel at the time of sale.

“At no point in time during this period was the Condominium a residential complex … since all or substantially all of the leases, under which the Condominium was supplied during this period” were for less than 60 days, judge Steven K. D'Arcy wrote.

“Since the Condominium was not, at the time that it was supplied by way of sale, a residential complex, the supply by way of sale was not an exempt supply under … the GST Act. It was a taxable supply of real property.”

The court’s decision shows how important it is for property owners to be aware of current tax laws when deciding how to use a property, lawyers from Pallett Valo, a Mississauga law firm specializing in commercial real estate, wrote in a blog post about the ruling.

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