Be careful when doing short-term rentals on Airbnb! Canada's new tax regulations have been released, and selling a house also requires a 13% tax
According to a recent ruling by the Canadian Tax Court, hosts who rent properties on Airbnb or other short-term rental websites for a long time are required to pay a 13% HST when selling their properties. This tax rate will apply to the entire selling price of the property, which means homeowners may have to pay tens or even hundreds of thousands of Canadian dollars in taxes at once.
Although the sale of second-hand residential properties is generally exempt from HST, the Canadian Tax Court ruled in March that the sale of apartment units used for multiple short-term leases on Airbnb is subject to HST. This ruling may have a significant impact on short-term lease operators as it clarifies that the Canada Revenue Agency (CRA) can levy this tax in similar situations.
John Zinati, a real estate lawyer at the law firm Zinati Kay in Toronto, said, "If people want to rent out their properties on short-term rental platforms for the long term, they must be very cautious. They will be subject to significant taxes. If they sell a unit for CAD 1 million, they will need to pay CAD 130000 in taxes
Zinati stated that this tax rule applies to any type of property, including apartments, townhouses, and single family homes that are continuously rented out for short-term periods on platforms such as Airbnb and VRBO.
In the case ruled, an Ottawa apartment owner began a 14 month short-term rental on Airbnb in 2017 after renting for 9 years. When he sold the property in April 2018, he did not pay the HST. Afterwards, the Canadian tax department determined that the unit had been converted from residential use to commercial use, and therefore an HST should be charged upon sale.
Despite the owner's appeal, the court ruled in March this year that the property is not classified as a "residential complex" and is subject to HST as it is considered a short-term rental property similar to a hotel. This means that if the property is still being sold as a short-term Airbnb rental, the tax will apply, but if it is restored for residential use before sale, it may not be subject to the 13% HST.
Image source: CTV
Zinati said, "If you only occasionally rent out your property on weekends, this tax rule does not apply. It must be for continuous use, and in this case, the landlord has been renting out continuously for 14 months, so it meets the tax conditions
In Toronto, short-term rental is defined as a continuous lease term of less than 28 days.
The CRA spokesperson stated that the court provides Canadians with an "independent review" of disputed issues, and the court's ruling "clarifies the law or resolves disputes between the CRA and taxpayers".
Dale Barrett, founder and president of Barrett Tax Law Firm, stated that this ruling has provided the public with a better understanding of the law. People know very little about HST and do not understand how consumption tax applies to real estate
Zinati added that the ruling also reflects the Canadian Revenue Agency's trend of strengthening tax administration in the real estate sector - recent capital gains tax and resale contract tax are both manifestations of CRA's attempts to curb tax "loss".
Barrett said that in the future, homeowners need to understand a "90% threshold" - that is, if the proportion of short-term rentals reaches 90% or more, they need to pay HST when selling. Although the specific calculation method for the 90% threshold is not yet clear, this may be explained in another case.
Barrett said, "If you decide to rent out your property for a short period of time, be careful. Before selling your property, consult with experts who understand the law
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