In 1351231 Ontario Inc. v. The King (2024 TCC 37), the Tax Court of Canada (TCC) held that a condo initially used for long-term rentals but later listed on Airbnb did not qualify as a โresidential complexโ under the Excise Tax Act (ETA), making its sale subject to HST.
The corporation had purchased the unit in 2008, treating it as HST-exempt. It was rented out long-term (over 60 days) for nine years, maintaining its exempt status. In 2017, the unit was switched to short-term Airbnb rentals, and then sold in 2018. The CRA assessed roughly $80,000 in HST, arguing the sale was taxable.
Under the ETA, a property can only qualify as a residential complex if it isnโt used as a โhotel, inn, lodging house or similar premisesโ where 90% or more of rentals are under 60 days. The TCC found that Airbnb use met this test, and the switch to short-term rentals triggered a โchange in useโ under s. 206(2), making the unit’s subsequent useโand its saleโfully taxable.
The corporation argued that under s. 197, since short-term rentals made up less than 10% of the propertyโs use over its lifetime, the property remained exempt. The court rejected this, clarifying that s. 197 did not override the earlier change in use under s. 206(2).
This ruling is a warning to tax practitioners: using residential properties for short-term rentalsโeven occasionallyโcan jeopardize HST exemptions and trigger significant tax liability on sale. The CRA continues to audit such scenarios, often years later, reducing expected profits from these activities.
Key Takeaways for Homeowners & Investors:
(1) If you use your property for short-term rentals, especially on platforms like Airbnb, you could be on the hook for HST when you sell, even if itโs a resale unit.
(2) The property might lose its โresidential complexโ exemption if it’s operated similarly to a hotel (short stays, utilities included, furnished setup).
(3) Before selling, itโs essential to get legal and tax adviceโespecially if the property has a mixed-use history.
(4) Buyers should also protect themselves by requesting a Section 194 certificate from the seller confirming whether the transaction is HST-exempt
If you are thinking of purchasing a property to rent out in Toronto or any other city in Ontario, call Capulli Law LLP – we are always available to help.