A 2024 judgment from the Tax Court of Canada clarified the interpretation of the Excise Tax Act for the purposes of assessing Goods and Services Tax GST on sale of items of real property, such as condominiums, in use for short-term rentals at or just prior to the time of sale. Canadian property owners, and especially those contemplating the sale of residential properties currently in use as rental units for commercial and business purposes, may wish to familiarize themselves with important points of the court’s decision in the case. To learn more about how the court’s judgment in 1351231 Ontario Inc. v. The King may apply to GST/HST in your situation, consider reaching out to an experienced Nova Scotia tax lawyer with Jeremy Scott Law. Call (902) 403-7201 today to set up a consultation.
What Is GST Tax in Canada?
GST stands for “Goods and Services Tax.” GST is imposed on most sales of, as the name suggests, goods or services, throughout Canada. Some provinces use a separate, yet similar, sales tax, known as Provincial Sales Tax (PST), with its own procedures for remittance to the proper provincial authorities. Other provinces combine their sales taxes with the federal Goods and Services Tax. Businesses in these provinces will collect and remit a single payment for both federal and provincial sales taxes, under the heading of HST – Harmonized Sales Tax. Businesses operating exclusively within Alberta will not be responsible for a provincial sales tax, as Alberta does not impose a sales tax at the provincial level; however, local taxes, such as those imposed by municipalities, may still apply.
Zero-Rated and Exempt Supplies
Generally speaking, the item sold or purchased on which GST might be charged is known as a “taxable supply.” While GST is levied on most goods and services bought or sold in Canada, there are two main categories of sales to which GST does not apply. These categories are “zero-rated” supplies and “exempt” supplies.
The difference between “zero-rated” and “exempt” can puzzle people who are not accustomed to working in Canadian tax law as a matter of course, but closely parsing the distinction can make it easier to understand the judgment reached by the court in 1351231 Ontario Inc. v. The King, as well as the implications of the court’s reasoning for any sale of a condo under similar circumstances.
Zero-Rated Supplies
A zero-rated supply is a taxable supply under the Excise Tax Act. In this sense, a zero-rated supply is subject to GST/HST. However, the rate at which a zero-rated supply is taxed is set to – as the name would suggest – 0%. A number of classes of goods are zero-rated under GST, including a range of basic grocery items, various forms of medication, and most livestock and fishery products. Additionally, many goods and services that would be subject to GST if sold within Canada are taxed at the zero-rating level when exported.
The practice of “zero-rating” has important implications for business tax credits as well as a business’s tax liability. A business which sells a zero-rated supply will not need to collect and remit GST or HST on that sale. However, the same business may be able to claim Input Tax Credits (ITCs) on the taxes that were paid, or those that were payable, on the materials the business acquired in order to provide the zero-rated supplies.
Exempt Supplies
Exempt supplies, by contrast to zero-rated ones, are supplies to which Canada’s GST does not apply. Businesses that only provide exempt supplies are not usually eligible to register for GST/HST, although there are some exceptions. A key difference between an exempt supply and one that is zero-rated is that businesses are not normally able to claim ITCs on the supplies and property purchased in order to provide supplies classified as exempt.
Important services in the “exempt” category include child care services provided for less than 24 hours per day, legal aid services, and – crucial to the questions before the court in 1351231 Ontario Inc. V. The King – the sale of housing last used by an individual as a place of residence, or long-term residential rentals or condominium fees.
Does Airbnb Collect GST in Canada?
Short-term rental accommodations are generally considered a taxable supply and subject to the GST or HST, depending on the province. How the tax is assessed, and who is responsible for its collection and remittance, will depend on the status of the host (the owner of the residential property) with respect to the CRA’s requirements for GST registration. Some Airbnb hosts may not have the relevant number because they have registered for GST with the Canada Revenue Agency (CRA).
Businesses classified by the Canada Revenue Agency as “small suppliers” are not required to register for the Goods and Services Tax. The annual revenue “threshold” at which the Canada Revenue Agency requires GST registration is set at $30,000 cumulative within four calendar quarters. Airbnb hosts who rent out their own homes, infrequently, for short periods of time, may not have a GST number to provide because they have not registered with the CRA. To learn more about your obligations for GST registration or to discuss whether voluntary registration below the $30,000 threshold may make sense for your circumstances, consider scheduling a consultation with Jeremy Scott Law.
Airbnb Tax in Canada When Host Does Not Have a GST/HST Number
When the owner of a residential property in Canada lists their location as available for booking via Airbnb, the company asks the owner (or, in Airbnb parlance, the “host”) to provide their Canadian GST/HST number (or, in Quebec, their QST number). If an Airbnb host does not provide the company with a GST/HST number because they have not met the $30,000 threshold within four consecutive quarters, then to maintain Canadian tax compliance Airbnb will instead assess the taxable amount and add it to the cost guests pay for the booking. In other words: Guests will pay the applicable tax, but Airbnb collects and remits the tax on bookings made for accommodations listed by hosts who have not provided registration numbers.
Airbnb Tax in Canada When Host Is Not a Small Supplier
When the owner of a residential property exceeds $30,000 in revenue over any four consecutive calendar quarters from the short-term leasing of their property, they will be required to register for GST/HST (or, in Quebec, QST) and – as the CRA explains – to charge this tax on all transactions, beginning with the “supply” that caused them to exceed the threshold. To prevent Airbnb customers from potentially being charged GST or HST twice, if an Airbnb host offering a residential property in Canada for lease provides the platform with their GST/HST number, Airbnb does not assess and apply the sales tax on bookings made with that host; rather, the host is responsible for calculating the appropriate tax and including it in the price of their listing on the platform.
Airbnb Rentals as Commercial Activity
In issuing a decision in 1351231 Ontario Inc. V. The King, the Honorable Justice Steven K. D’Arcy determined that because the sale of the condominium met the definitional criteria for a supply, the issue to be decided by the Tax Court of Canada must be “whether the sale was a taxable supply.” Because the Excise Tax Act defines a taxable supply as one made in the course of “commercial activity,” and defines commercial activity in connection with real property as making any non-exempt supply “by the person of real property of the person,” the court concluded that the sale of the condominium “was a supply of real property of the Appellant” and that it must therefore have been “made in the course of a commercial activity unless the sale of the Condominium was an exempt supply.”
What Is Exempt vs. Taxable Supply for GST?
The court identified three criteria that the sale of the condominium would need to meet in order to be considered an “exempt” supply. Those criteria were:
- The condominium sold met the definition of a residential complex
- If the condominium was a residential complex, the Appellant (the owner who sold the condominium) was not a builder of that complex
- The Appellant did not claim an Input Tax Credit for their most recent transaction aimed at making improvements to the condominium
The second and third of these criteria are dispensed with relatively quickly in the text of the court’s decision, one of them being agreed-upon already by the parties. Consequently, much of the decision is concerned with determining whether the condominium constituted a residential complex at the time of its sale.
Is an Airbnb Condo a Residential Complex?
At issue in 1351231 Ontario Inc. V. The King was whether the condominium, at the time of sale, would be excluded from the definition of a residential complex under the terms of subsection 123(1). The definitions provided in this subjection specifically exclude from exemption any buildings or portions of buildings leased as rental accommodations for which “all or substantially all” of the leases are for a period of fewer than 60 days.
Under these terms, any building owned and operated primarily for the purpose of collecting short-term rents would not meet the criteria for an exempt supply on the basis of its status as a residential complex. Thus a condominium owned and leased primarily for short-term accommodations would not normally be considered an exempt supply under that basis, but one that was used primarily for long-term leases might still qualify even if occasionally leased via Airbnb or another similar platform.
Sale of Condo Change-in-Use: Section 206
Because the condominium on which the Appellant in 1351231 Ontario Inc. V. The King had not paid GST had spent much of its time in the Appellant’s possession as the site of long-term residential leases, the court considered whether “change-in-use” rules for real property under 206 of the Excise Tax Act. These rules govern the eligibility for input tax credits relative to an inception or increase in commercial use of a piece of real property by defining the date on which such commercial use begins or increases as a re-acquisition of the property, with tax liability and credit to be assessed from the date of the most recent acquisition (both of which may be altered by a subsequent change in use of the same property by the same owner).
Sale of Condo Change-in-Use: Section 197
The Appellant in the case advanced the argument that because the condo was in use for short-term rentals for only about 9.9% of the total period of ownership, the shift to use as short-term rental accommodations constituted an “insignificant change of use” pursuant to Section 197 of the Excise Tax Act. However, the court considered that in light of the provisions of section 206, the question of commercial vs. residential use must be dated to the most recent (re)acquisition of the property, and could not refer to the total period in which the property had belonged to the Appellant.
“Section 197,” under this interpretation, applies only to a “cumulative change in use of the real property” calculated from the date of the most recent acquisition. The court identified this date as February 25, 2017, when the Appellant first listed the property as an Airbnb condo rental.
Charging and Collecting GST/HST
The court’s exposition on the nature and purpose of GST is instructive, not just for owners of condos that may be leased for short-term rental accommodations but for Canadian business owners and entrepreneurs seeking to better understand their sales tax obligations more generally. The GST, as explained in the court’s decision, is a value-added tax that is assessed on each individual “supply” at the moment the supply is made (roughly speaking, the moment of the transaction).
Determining Whether GST/HST Applies
The GST registrant is responsible, for each supply separately and at the moment the supply is made, for
- Identifying the recipient
- Determining whether the supply is taxable or exempt
- Ascertaining whether the supply is made in Canada and whether it is made in a participating (HST) province
- Establishing the consideration for the supply
GST Time of Supply
On the basis of all these decisions, a Canadian business owner assesses, collects, and remits GST/HST (or, in Quebec, QST) for each supply individually (even if a single transaction includes more than one supply). Because the determination of applicability must be made not only for each supply (broadly, each item), but on the basis of the factors in place at the time the supply is made, the Tax Court of Canada ruled that the condo was being used, at the time of its sale, exclusively for commercial activity via short-term rentals, and consequently denied the appeal.
Learn More About GST/HST on Sales of Real Property
GST/HST requirements can be complex, especially when change-in-use of real property may be a factor. Determining when such a change in use occurs, and whether a specific use may constitute an exempt supply, can also present Canadian property owners and entrepreneurs with a variety of challenges. To discuss the implications the March 2024 Tax Court of Canada condo sale decision may have for your situation, reach out to an experienced Canadian tax lawyer with Jeremy Scott Law. Schedule a consultation by calling (902) 403-7201 today.