Due to the proposal to deny deducting expenses related to non-compliant short-term rentals, some owners may consider selling their short-term rental property. While it is widely discussed that gains on the sale of a short-term rental property are generally taxable, the GST/HST implications of such a sale may be a surprise.
A March 15, 2024 Tax Court of Canada case considered whether the sale by a corporation of a condominium unit used for short-term rentals attracted GST/HST. The condo was originally acquired in 2008 and used for long-term residential leases. In 2017, the property began to be used solely for short-term rentals (all less than 60 days). The corporation sold the property in 2018 to an arm’s length purchaser; no GST/HST was charged or remitted on the sale. The taxpayer was registered for GST/HST.
The taxpayer was assessed $77,079 of GST/HST that was collectable on the property sale as CRA asserted that it was a taxable supply.
Taxpayer loses
For the sale of the condo to not be subject to GST/HST (that is, an exempt supply), the following three conditions must be met:
- the taxpayer was not a builder of the condo;
- the taxpayer did not claim an input tax credit (ITC) with respect to the last acquisition of the condo by them or with respect to an improvement to the condo; and
- the condo was a residential complex.
All parties agreed that the taxpayer was not a builder, and no ITCs were claimed on the condo or its improvements.
As such, the Court examined whether the condo was a residential complex. The Court stated that if all of the following conditions applied, it would not be a residential complex:
- the condo was part of a building that was a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises;
- the condo was not owned by an individual who used the property primarily as a place of residence for themself or a related person; and
- all or substantially all of the leases, licences or similar arrangements of the condo were provided (or expected to be provided) for continuous periods of use of less than 60 days.
The Court opined that point (a) was met as the furnished condo with utilities included in the short-term rental was akin to these accommodations. In addition, neither the vendor nor purchaser was an individual and therefore point (b) was satisfied.
Regarding point (c), CRA argued that the all or substantially all tests should be determined at the time of the sale rather than over the period of ownership, as argued by the taxpayer. The Court found that, at the time of sale, all or substantially all of the leases were for less than 60 days. The Court further stated that, even if it were to accept the taxpayer’s argument, the relevant period of ownership would span from the change in use (long-term rental to short-term rental) to the sale. Both would lead to the same result; point (c) being met.
As all three points were satisfied, the condo was not a residential complex, and therefore, the sale attracted GST/HST as it did not constitute an exempt supply.
The Court also opined that the taxpayer acquired the property in 2008 to provide the exempt supply of long-term residential rent and, therefore, did not pay GST/HST on the acquisition of the condo. The Court then found that the taxpayer was deemed to have essentially acquired the condo when they began to use the condo in commercial activities (short-term rentals) in 2017. As the taxpayer did not pay GST/HST on the acquisition in 2008, the taxpayer could not claim any input tax credits on the deemed acquisition in 2017.
Disclaimer: The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.
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