While the sale of a previously occupied residential property is generally exempt from HST, the Tax Court of Canada (the “Court”) in 1351231 Ontario Inc. v. The King, 2024 TCC 37[1] recently held that the sale of a used condominium unit rented out on Airbnb for a series of short-term leases was subject to tax.
Facts
In February 2008, 1351231 Ontario Inc. (the “Appellant”) purchased a used condominium unit (the “Property”) in Ottawa, Ontario. For the first nine years, the Appellant leased the Property to third-party individuals through long-term leases exceeding 60 days. However, on February 25, 2017, the Appellant listed the Property for rent on Airbnb, and for most of the last 14 months that the Appellant owned the Property, rented it out to third-party individuals for short term periods. Upon selling the Property to an arm’s-length purchaser, neither party remitted HST. The Minister took the position that the appellant’s short-term leasing of the unit constituted a change in use of the unit pursuant to s. 206 of the Excise Tax Act (the “Act”) which deemed the unit to have been sold to and acquired by the appellant on February 25, 2017. Consequently, the Minister of National Revenue assessed the Appellant under the Act for HST collectible on the sale, leading to the appeal before the Court.
The Appeal
The question before the Court was whether the sale of the Property was subject to HST, which, pursuant to the Act, is imposed on the recipient of a “taxable supply” that is “made in Canada.”[2] A “supply” is defined as “the provision of property or a service in any manner, including sale”,[3] and a “taxable supply” is a “supply made in the course of a commercial activity”.[4] A commercial activity refers to “the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply”.[5] If the sale was subject to tax, it would be levied on the value of the consideration for the supply at the 13% HST rate applicable to supplies made in Ontario.
The Court affirmed that the sale of the Property fell within the Act’s definition of “supply”, and that since it involved real property, it was deemed part of a commercial activity and therefore taxable, unless exempt.
Generally, the sale would be exempt under the Act if the following conditions were satisfied:
- The sale of the Property was the sale of a residential complex; and
- The Appellant was not a builder of the Property.
The Court was satisfied that the Appellant did not meet the Act’s definition of builder. However, with respect to the first condition, the Court determined that the sale did not constitute the sale of a “residential complex”, despite the Property being a residential unit. It held that the Property fell under the Act’s general exclusion for being considered a “residential complex” due to the following:
- At the time of sale, the Property was operated similarly to hospitality establishments like hotels, motels, inns, boarding houses and lodging houses, as it was being offered for short-term leases on Airbnb on a furnished basis, with the Appellant covering the costs of utilities, including heat and electricity;
- At the time of sale, all or substantially all the leases for the Property were for periods of possession of less than 60 days; and
- The Property was not a building or condominium owned by an individual, and therefore the building it was a part of did not meet the criteria pursuant to subsection 123(1)(c) of the Act’s definition of a “residential complex”.
The Court also discussed the change-in-use rules for real property contained in subsection 206(2) of the Act, noting its importance in determining whether the exclusion in the definition of “residential complex” applies to the Property. Subsection 206(2) provides that where an HST registrant does not acquire real property for use as capital property in its commercial activities, but then begins, at a particular time, to use the property as capital property in its commercial activities, it is deemed at that time to have received a supply of the property by way of sale, which is subject to tax, unless exempt.[6]
The Court found subsection 206(2) applicable to the Property for the following reasons: (1) the Appellant was an HST registrant at the time it had acquired the Property and retained that status throughout the relevant period; (2) the Appellant acquired the Property in February 2008 for use as a capital property in long-term residential leases exceeding 60 days (which are considered exempt supplies under the Act); and (3) the Appellant started using the Property in the course of its taxable commercial activities on February 5, 2017, when it listed the Property on Airbnb for short-term leases. The Appellant was therefore deemed to have received a supply of the Property on February 25, 2017, by way of sale.
The Appellant argued that Section 197 of the Act applied, which limits subsection 206(2) to situations where the change in use is 10% or more. The Appellant contended that between the time he purchased the Property in 2008 to when it was sold in 2018, he supplied it by way of taxable short-term leases for 366 days, meaning it was used only 9.9% of the time for commercial activities. However, the Court held that the change-in-use rules apply at particular points in time that changes in use occur, and that it is at the time of each change in use that a supply is deemed to occur. As such, the Court noted that section 197 clearly did not apply because during the period beginning on the day the Appellant acquired the Property and ending on the date of the change in use, being the date the Appellant listed the Property on Airbnb, the change in use was 100%.
The Court concluded that the Appellant was deemed to have acquired the Property on February 25, 2017, and that from that date until it was sold, the Appellant only used it to make taxable supplies by way of short-term leases, and that at no point in time during this period was the Property a “residential complex”, since substantially all of the leases under which the Property was supplied provided for periods of continuous possession of less than 60 days.[7] Further, as the Property was not, at the time it was supplied by way of sale, a “residential complex”, the supply by way of sale was not exempt and was therefore a taxable supply of real property.[8]
Key Takeaway
This decision highlights the need for property owners to carefully consider the tax consequences of changing property usage. 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. The decision also underscores the importance of a purchaser obtaining from the seller a certificate under section 194 of the Act whereby the seller confirms that the sale is exempt from tax under the Act.
[1] 1351231 Ontario Inc. v. The King, 2024 TCC 37.
[2] Ibid at para 13.
[3] Ibid at para 15.
[4] Ibid at para 16.
[5] Ibid at para 16.
[6] Ibid at para 35.
[7] Ibid at para 98.
[8] Ibid at para 99.
The authors would like to acknowledge the assistance of Pulkit Sahi in writing this article.