Canadian homeowners might want to think twice before listing their properties on Airbnb as they might have to pay a 13 per cent tax on the property if they sell it.
The relatively new tax ruling comes following a decision earlier this year from the Tax Court of Canada that says properties that are consistently rented out on short-term listing platforms are subject to HST on the property when they sell it. This could equal hundreds or thousands of dollars in tax.
The tax rules apply for any property type, including condos, townhomes and single-detached homes, as long as they are being consistently used for short-term rentals (less than 28 days) on platforms like Airbnb and VRBO. The tax implications also apply to short-term rentals that are furnished with utilities included, and if the property resembles a hotel-like business model.
The court ruled that properties used for consistent short-term rentals are actually operating as commercial properties, not residential ones. The decision was made in the case of a condo owner in Ottawa who was subject to GST/HST after renting the unit on Airbnb for multiple short-term leases for 14 months before selling it.
The owner purchased the unit as an investment property in Feb. 2008 and for nine years onward he rented out the unit for long-term leases before posting it on Airbnb, as outlined in the 1351231 Ontario Inc. v. The King case.
The court found that it was a “residential complex” and was being operated like a hotel, so it can be taxed as a property, thus the owner had to pay $77,079.64 in GST/HST tax.
According to a statement to the Toronto Star by President and Founder of Barrett Tax Law Dale Barrett homeowners should be aware that there’s a 90 per cent threshold of renting out the property, which determines if they’ll be subject to HST upon sale or not.
However, that 90 per cent still doesn’t have a clear definition. Any disputes on property taxes would be assessed by the Canada Revenue Agency.
HOW TO PROTECT YOURSELF AS A PROPERTY OWNER
Rental company Deeded.ca says there are ways to protect oneself as a property owner in light of the ruling.
It recommends property owners to keep a detailed record of all rental periods including the financial trail, to understand and monitor their short-term versus long-term rental ratio and to plan for the future and ensure they include the potential tax amount when selling their property.
The company also urges homeowners to consult with tax experts and real estate agents when selling their property.
