The GST and income tax implications of the sale of single unit short-term rental properties has recently become a hot issue. As a means of dealing with Canada's housing crisis, the federal government, some provinces and many municipalities have implemented laws to induce or force owners to sell these properties or convert them to long-term rentals or personal residences. Short-term rental properties have proliferated over the past decade with the success of online platforms such as AirBnB and VRBO.

This article discusses the GST implications of the sale of a property that has been used wholly or partially for short-term rental purposes. The implications of the conversion by the owner to long-term rental or personal occupancy will be discussed in a separate article .

Residential property exemption

The sale of a residence such as a house or condominium unit is generally exempt from GST once it has been occupied as a place of residence. The exemption generally applies to a “residential complex”[1] that has been occupied. A residential complex encompasses various types of residential building or parts thereof, which contain one or more “residential units”, plus the common areas and land that are reasonably necessary for the use and enjoyment of the building as a place of residence.  A house, a residential condominium unit and a place of lodging (e.g., a hotel room) are residential units.

Exclusion for "hotel-type" properties

However, the definition of residential complex excludes a building, or part of a building:

1. that is a hotel, motel, inn, boarding house, lodging house or other similar premises (the "Hotel Test");

2. that is not a house or condominium unit owned by an individual and used primarily as a place of residence of the individual or a relative or former spouses or common-law partner of the individual (the "Individual Owner Test"; and

3. all or substantially all of the room rentals are, or are expected to be, for periods of less than 60 days (the "60 Day Rental Test"). 

Properties that satisfy all three tests are referred to as “hotel-type properties”.  All room rentals are taxable, even if they are for a period of more than 60 days.  The sale of a hotel-type property is taxable since it is not a residential complex.

The leading case

The leading hotel-type property case is the recent Tax Court of Canada decision in 1351231 Ontario Inc. v. The King. The case involved the sale of a used condominium unit in Ottawa that the appellant, a corporation, had held as an investment property. For the first 9 years that it owned the unit, the corporation rented it to third parties under long-term leases. However, for the last 14 months that it owned the unit, the corporation leased it under a number of short-term leases through the AirBnB platform. The case turned on whether the unit was a residential complex at the time of sale.

Since all three tests described above were present, the Tax Court found that the property was not a residential complex. The sale was therefore taxable. In his Reasons for Judgment, Justice Steven D'Arcy dealt extensively with the application of the Hotel Test and 60 Day Rental Test.

The Hotel Test

Justice D'Arcy made the following comments on the application of the Hotel Test. They are similar to the administrative practice of the Canada Revenue Agency ("CRA") set out in its Policy Statement P-099.

[78] I will first address the Appellant’s argument that the Condominium was not similar premises to a hotel or motel.

[79] The Respondent correctly noted that when determining whether the exclusion applies, one must consider all of the words in the definition of residential complex. The exclusion refers to premises that are a hotel, a motel, an inn, a boarding house, a lodging house and other similar premises.

[80] The question before the Court is whether the Condominium, at the time that it was sold, was similar premises to a hotel, a motel, an inn, a boarding house and a lodging house. The answer to that question is yes.

[81] At the time of sale, the Appellant was offering the Condominium for short‑term lease on the Airbnb platform and was in fact leasing it for periods as short as one night. The Condominium was leased on a furnished basis with the Appellant paying all heating, air conditioning and electricity costs. Since the Court was not provided with the Airbnb listing, it is not clear what other amenities were provided to the lessee. However, the evidence before me was that the Appellant did provide Wi-Fi access as part of the short-term lease.

[82] In my view, a Condominium being leased in such a manner is similar premises to a hotel, motel, an inn, a boarding house, or a lodging house.

[83] Collectively, hotels, motels, inns, boarding houses and lodging houses are premises that are regularly supplied as accommodations to third parties on a short‑term basis for a fee.

[84] The short-term accommodations provided in a hotel, motel, inn, boarding house and lodging house are normally furnished accommodations. Rooms and suites in a hotel, motel or inn are supplied with heat, electricity and, in many instances, air conditioning.

[85] The definition refers to a wide range of accommodations. A hotel or a motel may be a single room or a suite. The Canadian Oxford Dictionary defines a lodging house as being equal to a rooming house and defines a rooming house as a house or building divided into furnished rooms or apartments. When one considers all of the types of physical accommodations provided in a hotel, motel, inn, boarding house or lodging house, it is clear that similar premises include a furnished condominium that is leased on a short-term (or even long-term) basis.

[86] The Appellant argued that the Condominium was not similar to a hotel or a motel since it did not have a restaurant or otherwise provide food to the lessee. This argument assumes that all hotels and motels have restaurants. I have no evidence before me to support such a conclusion. Further, the fee charged by most hotels or motels for a room or a suite only covers the cost of the room or suite; it is not a fee for food. It is the guest’s decision whether they want to purchase food from the hotel/motel.

Subparagraph b above clearly applied because the condominium unit was not owned by an individual.

The appellant tried to argue that the "all or substantially all" test in subparagraph c above was not met because, over the ten plus years that it owned the property, all or substantially all of the rentals were for periods of more than 60 days. Justice D'Arcy pointed out that that test applies only at a point in time; i.e, when the property is sold.

[91] When determining, under the GST Act, whether a taxable or exempt supply has been made, it is important to recognize that the tax levied under the GST Act is a value‑added tax that is levied on individual supplies. The application of the tax must be determined for each individual supply. This determination is made at the time that the supply is made. Specifically, it is at the time that the supply is made that one determines the recipient of the supply, whether the specific supply is a taxable supply or an exempt supply, whether the supply is made in Canada, whether the supply is made in a participating province, and the consideration for the supply.

[92] As a result, the Court must determine whether, at the time of the sale of the Condominium, the Appellant made an exempt supply or a taxable supply.

[93] This determination is dependent on the exempting provision in section 2 of Part I of Schedule V to the GST Act. The application of this provision is dependent on whether, at the moment that the Appellant sold the Condominium, namely, on April 11, 2018, the Condominium was a residential complex as that term is defined in subsection 123(1) of the GST Act.

[94] This requires the Court to determine whether, at the time that the Appellant sold the Condominium, all or substantially all of the leases under which the Condominium was being supplied at that point in time provided or were expected to provide for periods of continuous possession or use of less than 60 days.

[95] The answer is clearly yes. At the time of sale, the Condominium was only being leased under short-term leases. All such leases were for less than 60 days; most were for only a few days. Therefore, on the day that the Appellant sold the Condominium, all or substantially all of the leases, under which the Condominium was supplied, provided, or were expected to provide, for periods of continuous possession of less than 60 days.

Another Tax Court case, Koppert[8], involved a chalet in Whistler, BC that was available to the public for temporary accommodation.   A local management company arranged the rentals.  The occupants would either be mailed the key or could pick up the key at a place arranged by the management company, who provided cleaning services upon the departure of each occupant.  The Tax Court found that the chalet was a “similar premise” and therefore a hotel-type property.

CRA administrative practice

The CRA provides the following guidelines for hotel-type properties in its Policy Statement P-099:

The determination of whether an establishment is a hotel, motel, inn, boarding house, lodging house or other similar premise, should be based on considerations involving all the following guidelines, but not all the guidelines necessarily apply to a given establishment since they may depend on the type of establishment and location of the establishment in question. Where applicable, the conditions described in these guidelines should generally be present throughout the year.

• the establishment normally provides temporary accommodation rather than a permanent place of residence;

• where required by municipal and/or provincial regulations, the establishment is licensed for business for the purpose of providing a temporary place to stay;

• the establishment is available for rental to the public on a temporary [transient] basis;

• where appropriate, there is a common registration area;

• the rooms or suites in the establishment are furnished by the supplier;

• depending on the nature of the establishment, housekeeping services and other facilities are available such as restaurants, meeting rooms, stores, etc.;

It is generally a requirement in all cases that there be a clear intention to operate the facility as a hotel/lodging or similar establishment. 

Property used partly as an individual's residence

The rationale set out by Justice D'Arcy applies by itself to the sale of a property by an individual who has used it only as an investment property. However, the analysis has further complications where a property owned by an individual is used at the time of sale partly for short-term rental purposes and partly as a place of residence of the individual or a relative, former spouse or common law partner of the individual. To further complicate matters, the rules apply differently where the residential and hotel-type use are consistently in separate parts of the building (for example, a bed and breakfast) vs. where the use of the building alternates over time between residential and hotel-type (for example, a unit in condominium resort hotel property is placed in a rental pool at certain times and used personally at others).

Residential and hotel use separated by space

Where the residential and hotel-type uses are consistently in separate parts of a property, and the primary use is residential, the entire property is considered to be a residential complex. The hotel-type use is ignored and the sale is fully exempt[5].

However, where the primary use of such a property is as a hotel-type property, the two parts are deemed to be separate properties. The residential portion is exempt while the hotel-type portion is taxable. The sale proceeds must be allocated between them.

For example, where a property used 70% as a bed-and-breakfast and 30% as the residence of the proprietors is sold, the two parts are treated separately.  The bed-and-breakfast portion is taxable, while the residential portion is exempt.  However, if those numbers are reversed, such that the residence comprises 70% of the space, the sale is entirely exempt.

The same analysis applies where an individual lives in one part of a property and uses the other part for short-term rentals through a local property manager or a platform such as AirBnB or VRBO.

Residential and hotel use separated by time

Where the use of an entire property owned by an individual alternates over time between residential and hotel-type use, the two parts are not deemed to be separate properties. If the primary use is residential, the property is a residential complex and the sale is fully exempt. However, if the primary use is as a hotel-type property, the property is not a residential complex and the sale is fully taxable.

A common example of this type of property is a condominium resort hotel where the owner of a unit puts it in a “rental pool” when he or she is not using it personally. There have been many disputes between registrants and the CRA over how to calculate residential vs. short-term rental use of vacation and resort properties.  The main source of conflict has been how to allocate periods of vacancy when the unit is available for rental and not being used personally.  These periods are often significant for seasonal properties.  The issue mainly arises in respect of input tax credits for tax paid on the purchase or improvement.  However, it also applies in determining whether a sale is taxable.

The CRA’s position, set out in their Info Sheet GI-025, is that periods of vacancy are disregarded, and one simply compares the days rented to the days used personally.  Owners tend to allocate the periods of vacancy to the commercial activity of hotel-type rentals, arguing that the unit is available for rent and the owner must continue to pay the management fees and other operating costs.  There have been a few court cases on this issue to date, but none has provided guidance on finding a compromise between the two extremes.