Oct 6, 2022

The Boundaries of the GST Residential Property Exemption

The sale of a residence such as a house or apartment building is generally exempt from GST once it has been occupied as a place of residence. However, this exemption has limits and does not always apply where one might intuitively think it should. In other words, if it looks like a house and smells like a house, it isn’t always taxed as a house.

The residential property exemption generally applies to a “residential complex”[1] that has been occupied. A residential complex includes a building or part thereof (“residential building”) which contains 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. 

The definitions of residential complex and residential unit are indeed complex.  However, their application is straightforward in most cases.  This article deals with the following types of properties along the boundary of these definitions, where the complexity comes into play.

  • Buildings that have become uninhabitable

  • Buildings that have been demolished to make way for new construction

  • Combined residential and non-residential use

  • Land attributable to a residential building

  • Hotel-type properties

  • Properties with a mixture of short- and long-term rentals

  • Bed and breakfast operations

  • Vacation properties with short-term rentals and/or personal use

A residential building must exist and be habitable at the time of sale

The courts have held that a structure is not a residential building if is under construction, but not yet habitable, or if it was previously habitable but has deteriorated to the point where that is no longer the case.  In Yakabuski[2], the Tax Court of Canada found that the sale by a corporation of a property that included a house that had been seriously damaged by fire, and partially demolished, was taxable.  Justice Margeson made the following summary comments:

When reviewing all of these terms with their clear common-use meaning, the Court is satisfied that that which was transferred according to the Contract of Purchase and Sale had to be capable of being used as a place of residence and that which was being transferred had to be a detached house or part thereof that was last occupied or supplied as a place of residence or lodging for individuals. These terms are almost synonymous with the term “inhabitable”.

Further, a piece of vacant land that was formerly improved with a residential building is no longer a residential complex once the building no longer exists. In Leowski[3], the Tax Court found that the sale by a corporation of vacant land on which a house had recently been demolished was not a residential complex and was thus subject to GST.  Justice Bowman made the following summary comments:

I do not think that the property was a “residential complex” as defined. Paras. (a), (b) and (c) refer to a part of a “building”. The plain meaning of “building” does not include a plot of vacant land, even if it has been preloaded with sand in anticipation of constructing a building on it.

A contractor who is purchasing an existing house with the intention of demolishing it and building a new one for sale may save tax by selling the property to his purchaser before demolishing the existing house.

Building designed as a residence is used for commercial purposes

Where a building that was designed for use as a residence, or was formerly used as a residence, is converted exclusively to commercial use (e.g., as an office building or showroom), the building is no longer a residential complex. 

For example, assume that a law firm purchases an older house from an individual who formerly lived there.  The purchase is exempt because, at that time, it is still a residential unit. It was last occupied by an individual as a place of residence. The law firm then proceeds to renovate the entire building for use as its offices.  Once they start work, the building is no longer a residential complex. It has been occupied for commercial purposes.  A future resale will be taxable.

Combined residential and non-residential use

A residential complex may include only part of a building or part of a plot of land.  Common examples include an apartment building that has retail space on the main floor, or a large working farm property that contains a farmhouse.  Where one of these “dual use” properties is sold, the residential and non-residential portions are deemed to be separate “supplies”[4].  If the non-residential portion is taxable, the sale proceeds must be allocated between the two parts.

An exception to this “dual use rule” occurs where a building owned by an individual is used primarily as a place of residence[5].  In that case, the commercial use is ignored, and the entire building treated as a residential complex[6].  A sale is exempt.  An example would be a three-storey building where the owner and his or her family live in the upper two storeys and operate a retail store on the ground floor. 

However, if the commercial use is primary, the dual use rule applies.  If the facts in the previous paragraph were reversed, such that two storeys were used commercially and one as a residence, the portion of a sale price attributable to the commercial stories would be taxable, while the portion attributable to the residential storey would be exempt. 

Land Attributable to a Residential Building

The CRA generally accepts up to half a hectare of land as being attributable to a residential building, and thus form part of the residential complex.  They will allow a larger portion only in limited circumstances, such as where there is a minimum residential lot size required by the local municipality, or where land is required for access to the building.  The CRA’s views on this matter, including six useful examples, are set out in paragraphs 10 through 17 of Memorandum 19.2.1

Where a property involving more land than may be included in a residential complex is sold, the excess portion of the land is deemed to be a separate supply under the dual-use rule.  If the supplier is a corporation, partnership or trust other than a personal trust, this excess portion is taxable. 

If the supplier is an individual or personal trust (such as an estate) the excess portion may be taxable or exempt, depending on the circumstances.  The applicable exempting provision[7] is complex and often difficult to apply in practice.  The issues surrounding it will be discussed in a separate article.

Hotel-Type Properties

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;

  2. that is not a house or condominium unit owned by an individual and used primarily as a place of residence (see above); and

  3. all or substantially all of the room rentals are, or are expected to be, for periods of less than 60 days. 

Properties that meet all three criteria are referred to below 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.

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. 

The courts have tended to take a broad view of whether a building is a hotel-type property.  For example, 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.

Properties with both Short- and Long-term Rentals

The third criterion for hotel-type properties is satisfied where “all or substantially all of the [rentals] provide, or are expected to provide, for periods of continuous possession or use of less than sixty days”.

The CRA interprets the phrase “all or substantially all” as meaning 90% or more.  Therefore, in their view, where more than 10% of the rentals are for 60 days or more, the building is not a hotel-type property and is a residential complex.  A common example is an apartment hotel that has a mixture of short- and long-term stays.  Rentals of units for less than a month are taxable, while rentals for a month or more are exempt[9]

The sale of such a “mixed stay property” is exempt if the owner did not claim partial input tax credits for the acquisition or capital improvement of the property.  If the portion of short-term rentals is low, or the property was acquired exempt, the owner might consider not claiming these input tax credits to preserve the exemption on resale.  Partial input tax credits related to the portion of short-term rentals may still be claimed for operating costs.

If the owner claims partial input tax credits for purchase or improvement of a mixed stay property, a future sale will be taxable.  However, the seller may claim at that time an input tax credit for the previously unclaimed portion of the tax paid on purchase or improvement[10] (i.e., the portion that related to the long-term rentals).

Some properties that are generally rented on a short-term basis have the occasional rental for 60 days or more.  If these longer rentals comprise slightly more than 10% of the total rentals, the property is technically not a hotel-type property.  It may be difficult to determine the status of a property where rentals for more than 60 days comprise slightly more than 10% of the total in some years and less in others.

Bed-and-Breakfast Operations

A building where a bed-and-breakfast is the primary use is an example of a dual use property.  The bed-and-breakfast portion is a hotel-type property.  The smaller portion where the owners and their family live is a residential complex.  For example, where a property used 70% as a bed-and-breakfast and 30% as a residence 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 under the exception to the dual use property rule discussed above.

Vacation Properties with Short-term Rentals and/or Personal Use

Many individuals own a house or condominium unit in a vacation or resort area.  Where such a property is held strictly for investment purposes, and rented 90% or more on a short-term basis, it is generally a hotel-type property.  A sale is taxable.  Conversely, if the use is entirely personal as a primary residence or second home, the property is a residential complex.  A sale is exempt. 

Many vacation or resort properties involve a combination of personal and short-term rental use.  A common example 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. Where the primary use of the unit is personal, the entire property is a residential complex. A sale is exempt.  However, where the primary use is for short-term rental, the entire property is generally a hotel-type property (and not a residential complex).  A sale is fully taxable.  The dual use rule does not apply because there is no separate portion of the property that is used exclusively as a residence (as is the case, for example, with a bed and breakfast). The seller may claim at that time an input tax credit for any previously unclaimed portion of the tax paid on purchase or improvement[10] (i.e., the portion that related to personal use).

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 the primary use is as a residence.

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.

[1] Ss. 123(1) of the ETA.

[2] 2008 TCC 27 

[3] [1996] TCJ No. 829 (QL), [1996] GSTC 55

[4] Subsection 136(2) of the ETA.

[5] of the individual, a relative or a former spouse or common-law partner of the individual

[6] Paragraph (c) of the definition of “residential complex” in ss. 123(1) of the ETA.

[7] Subsection 9(2), Part I, Schedule V to the Excise Tax Act.

[8] [1998] G.S.T.C  128

[9] S. 6, Part I, Schedule V to the ETA.

[10] Ss. 193(1) of the ETA.

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