Airbnb Conversion Triggers HST on Resale: A Cautionary Tale from the Tax Court of Canada
A recent decision by the Tax Court of Canada has made it clear that turning your long-term rental into an Airbnb could trigger a significant and unexpected GST/HST liability on resale.
In 1351231 Ontario Inc. v. The King, 2024 TCC 37, the Court upheld a CRA assessment of over $80,000 in GST/HST, finding that a condominium unit—originally used for long-term residential rentals but later listed on Airbnb—no longer qualified as a “residential complex” under the Excise Tax Act (ETA). As a result, the subsequent sale of the unit was fully taxable.
This case underscores how seemingly small operational changes in the gig economy—like switching to short-term rentals—can result in major tax consequences.
The Facts
- In 2008, the corporation purchased a used residential condo unit in Ontario, treating the purchase as HST-exempt, based on its intended use as a long-term residential rental.
- For nine years, the condo was leased under a series of tenancies longer than 60 days—residential leases that are exempt under section 2, Part I, Schedule V of the ETA.
- In 2017, the corporation began renting the unit out through Airbnb, typically for periods shorter than 60 days.
- In 2018, the unit was sold, and the corporation once again claimed the sale was exempt from HST.
- The CRA reassessed the corporation, arguing that the Airbnb use disqualified the unit from being a residential complex, making the sale taxable.
The Tax Court agreed with the CRA.
What Is a “Residential Complex” Under the ETA?
For a property sale to be HST-exempt under the ETA, it must qualify as a “residential complex.” This is generally true for used housing that has been leased long-term.
However, the ETA contains a critical exception: if the property is used as a hotel, motel, inn, boarding house, lodging house, or similar premises, and 90% or more of the use is for rentals under 60 days, then the exemption is lost.
The Court concluded that:
- Airbnb use falls under “similar premises.”
- The short-term nature of Airbnb stays meant “all or substantially all” of the use was for periods of less than 60 days.
- Therefore, the unit no longer qualified as a residential complex.
But the real twist came from the corporation’s legal argument under section 197 of the ETA.
Section 197: The Corporation’s Argument—and Why It Failed
The corporation argued that even though short-term rentals occurred in the final year, they only made up a small fraction of the total use of the property during the entire time it was held. For nine years, the unit was used for long-term residential rentals, and only the last year involved Airbnb. Based on this, the corporation turned to section 197 of the ETA.
What Is Section 197?
Section 197 deals with changes in a property’s use after it has already been used in a commercial activity. Specifically, it provides rules for adjusting Input Tax Credit (ITC) eligibility and is used to apportion credits if a property is later used in an exempt activity (like long-term residential leasing).
The corporation claimed that section 197 deemed the entire use of the unit to be 100% exempt activity (i.e., long-term leasing), because that use predominated over the full ownership period. If this were accepted, the property would still qualify as a residential complex and the sale would remain exempt from HST.
Why the Court Rejected the Argument
The Tax Court rejected this interpretation for three reasons:
- Misapplication of Section 197’s Purpose
Section 197 is designed to deal with adjustments to ITCs—not to recharacterize the nature of property use for the purpose of defining a “residential complex.” It governs the mechanics of credit allocation after a use change has occurred—not whether a property qualifies for an HST exemption on sale. - Timing of Use Matters
The ETA looks at the nature of use immediately prior to sale, not cumulatively over the property’s lifetime. Because the unit was being rented short-term via Airbnb when sold, that use was controlling. - Section 206(2) Takes Precedence
The first time the unit was offered on Airbnb constituted a “change in use” under section 206(2). At that point, the property transitioned to a commercial activity (short-term lodging), and the tax consequences followed. Once that change occurred, section 197 could not override it to retroactively deem the use exempt.
Key Takeaways for Property Owners and Airbnb Hosts
- Airbnb = Commercial Use. Even partial or late-stage use for short-term stays can transform a property into a taxable asset under the HST regime.
- Loss of Residential Complex Status. A property loses its exemption if 90%+ of its use is short-term—even if long-term use predominated earlier.
- No Rescue via Section 197. This provision cannot be used to “wash out” the effect of short-term rental use prior to sale.
- Watch for CRA Scrutiny. The CRA is actively auditing property owners for improper treatment of short-term rentals under both GST/HST and income tax legislation.
How Rabideau Law Can Help
Whether you’re listing a condo on Airbnb, planning a sale, or facing a CRA assessment, our team is here to help:
- Analyze your property’s use and HST status
- Assess potential tax exposure under the ETA
- Structure transactions to minimize tax risk
- Navigate CRA audits and respond to assessments
Before listing or selling a rental unit, talk to us. A quick consultation could save you thousands in unplanned HST liability.
Contact Rabideau Law today to protect your property and your bottom line.
*This article is provided for informational purposes only and does not constitute legal or tax advice. Please consult with a qualified professional to discuss your specific situation.*
