If you’ve been renting out your property on Airbnb or other short-term rental platforms, a new tax ruling in Canada could greatly affect you when it comes time to sell. The Tax Court of Canada recently issued a ruling that could leave homeowners who regularly rent out their property on Airbnb facing a hefty tax bill. In Quebec, we’re talking about 14.975% of the property’s sale price.
Here’s what you need to know about this decision and how it could affect you as a homeowner.
The shock: why it’s important
Normally, when you sell a residential property in Canada, the sale is exempt from sales tax (GST and QST). But that’s no longer the case if you’ve consistently used the property for short-term rentals like Airbnb or VRBO.
In a recent case, the court ruled that an Ottawa condo owner who had rented out his unit on Airbnb for 14 months before selling it had to pay the 13% harmonized sales tax (HST), the tax rate applicable in Ontario. CRA argued-and the court agreed-that since the property was being used as a hotel (short-term stays, fully furnished, owner covering utilities), it was no longer considered “residential” property at the time of sale. Instead, it was considered to be used for commercial purposes, triggering the obligation to pay HST.
For homeowners, this can mean tens or even hundreds of thousands of dollars in additional taxes when selling a property they were renting on short-term platforms. For example, if you sell your home for $1 million, you could end up paying $149,975 in taxes!
Long-term or short-term rental: what’s the difference?
The main distinction in this decision lies in how the property was used before it was sold. In the Ottawa case, the owner had rented his apartment on a long-term basis (more than 60 days at a time) for nine years. But when he switched to Airbnb rentals for shorter stays – just over a year before the sale – the tax situation changed.
Long-term rentals are still considered residential use, which is tax-free. But regular short-term rentals (such as weekend or week-long stays) can shift the property’s classification to commercial use, making the sale subject to tax. Essentially, if your property starts operating as a hotel, it’s taxed as a business.
This doesn’t mean that renting out your property from time to time for a weekend will cause problems. The tax only applies if you use it regularly for short-term rentals.
Why is this ruling important for Airbnb hosts?
The ruling clarifies that the Canada Revenue Agency (CRA) can apply this tax rule to any type of property – be it a condo, townhouse or single-family home – that has been rented out for short-term stays on platforms like Airbnb. This means that many Airbnb hosts, especially those who regularly rent out their properties, may have to consider whether to pay the tax at the time of sale.
The CRA has previously tackled real estate-related taxes, such as capital gains and assignment sales taxes, and this decision shows its continued focus on real estate transactions. This decision is part of a broader effort to close tax loopholes and ensure that rental income and real estate transactions are properly taxed.
How can the 90% rule affect you?
An important detail of the ruling is what is known as the “90% threshold”. This means that if 90% or more of your property is used for short-term rental, the sale will likely be subject to tax. While there are no clear guidelines yet on how exactly to calculate this 90%, tax experts suggest that if you rent the property on a short-term basis for more than 90% of its rental use, the CRA will likely consider it a commercial property.
On the other hand, if you use the property for long-term rental or personal use for at least 10% of the time, you could escape taxation.
What this means for owners and investors
If you’re considering renting out your property on Airbnb, it’s important to understand the tax implications if you plan to sell it later. Renting out your home in the short term can be lucrative, but the tax implications could reduce your profits when it’s time to move on.
One expert explains people need to be very careful if they want to use short-term rental platforms for their property consistently. They will be heavily taxed.
What to do next?
If you’re a current or potential Airbnb host, here are some steps you can take to protect yourself:
1. Know the rules: Understand the difference between long-term and short-term rentals and how they affect your property’s classification for tax purposes.
2. Consult a tax expert: If you regularly rent out your property on Airbnb, it’s worth talking to a tax professional who can help you manage potential tax liabilities when selling your property.
3. Keep records: be sure to document how often you rent out your property for short-term versus long-term stays. This could be important if you need to show the CRA how your property has been used.
4. Think about your rental strategy: If you plan to sell your property in the near future, think carefully about whether continuing to use it for short-term rentals is worth the tax.
This decision is a wake-up call for Airbnb hosts in Canada. Short-term rentals can be a great way to generate income, but they come with significant tax responsibilities, especially when it comes time to sell. Before you put your property up for sale, make sure you’re well informed about the tax rules and how they might affect your bottom line.