AirBnBs: Are They Rental Properties or Motels?

Short term rentals and investment properties, such as AirBnBs, have skyrocketed in Canada and elsewhere.

They provide an alternative option to hotels and motels for many when traveling. The law regarding short term rentals continues to evolve and develop to meet the needs of society or concerns of society. In some markets, such as British Columbia, there are concerns with the impact these short terms rental properties are having on the housing market and legislation has been enacted to address these concerns. Additionally, this year the Tax Court of Canada (“TCC”) dealt with whether the sale of a short term rental property should be subject to GST in 1351231 Ontario Inc. v The King, 2024 TCC 37. British Columbia’s new laws and the TCC’s decision are summarized below.

The Short Term Rental Accommodations Act

The Provincial Government of British Columbia passed Bill 35 in 2023, titled the Short-Term Rental Accommodations Act (the “Act”), which received Royal Assent on October 26, 2023. The purpose of the Act is to (1) return short term rental units to the long term housing market, (2) provide government the tools to enforce short term rental bylaws, and (3) establish a role for the Provincial Government in regulating short term rentals.[1]

As of May 1, 2024, some areas of British Columbia have limited which properties can be short term rentals. Pursuant to the Act, some areas in British Columbia may only allow short term rentals when the property is the principal residence of the owner and there is a secondary suite or accessory dwelling on the same property which is rented out.[2] Owners of short term rentals may also need to acquire a business license and display their business license when listing their short term rental.[3] Should individuals fail to abide by the Act, fines of varying amounts can be imposed.[4]  The Provincial Government of British Columbia projects that it will launch a provincial registry for short term rentals in early 2025, whereby hosts of short term rentals will be provided a registration number and any listings for short term rentals without valid provincial registration number will have to be removed.[5]

1351231 Ontario Inc. v The King, 2024 TCC 37 (“135 Ontario”)

Historically, used residential properties that are not being sold by a builder are considered exempt from GST when they are sold pursuant to Schedule V of the Excise Tax Act.[6] In 135 Ontario, the TCC came to the opposite conclusion.

The Appellant, 1351231 Ontario Inc., was registered for GST purposes under Part IX of the Excise Tax Act. The Appellant purchased a condominium in Ottawa in February 2008 (the “Condominium”). Beginning in February 2008, the Appellant leased the Condominium to third parties for periods of longer than 60 days, with the last lease expiring in February 2017. However, from February 2017 to April 2018, the Appellant began listing the Condominium on Airbnb, which allowed the property to be used as a short term rental. The Appellant accumulated a gross revenue of $11,200.00 in 2017 and $43,710.00 in 2018.

In 2018, the Appellant sold the Condominium to an arm’s length purchaser, with a closing date of April 11, 2018, and neither the purchaser of the Condominium nor the Appellant remitted GST in relation to the sale of the Condominium. The Minister of National Revenue assessed the Appellant for $77,079.64 as GST/HST that was collectible on the sale of the Condominium. In short, the Appellant used the Condominium for long term leases for the first nine years, and short term leases for 14 months before selling the Condominium. As such, the Minister of National Revenue was under the view that the Condominium was used for short term leases at the time of the sale. The Appellant appealed the assessment.

The TCC was tasked with the answering the question of whether the sale of the Condominium was subject to GST under Division II of the Excise Tax Act or was exempt from GST under Schedule V of the Excise Tax Act.[7] For the Condominium to be exempt under section 2, Part I, of Schedule V of the Excise Tax Act, it would have to satisfy the definition of a “residential complex” under 123(1) of the Excise Tax Act. The TCC went through an analysis of the Excise Tax Act to determine if the sale of the Condominium was exempt from GST and how to properly classify the Condominium.

The focus of the TCC’s analysis was how the property was used at the time of the sale, including that (i) the Condominium was only being leased for periods shorter than 60 days with periods as short as one night, (ii) the Condominium was furnished when it was leased, and (ii) the Appellant paid for many of the utilities (including Wi-Fi).[8] Based on the foregoing, the TCC stated that the Condominium was being used similarly to a “hotel, motel, inn, boarding house and lodging house” as these features are also common for hotels, motels, inns, boarding houses, and lodging houses.[9]

The Appellant argued that substantially all of the leases relating to the Condominium were long term leases because from February 29, 2008 to February 25, 2017, 100% of the leases were for periods longer than 60 days. However, the TCC stated that despite the Appellant’s claim, the Appellant was deemed to have acquired the Condominium on February 25, 2017 (when the Condominium began being used for short term rentals) by virtue of subsection 206(2) of the Excise Tax Act (often referred to as the “change-in-use rule for real property”).[10]

It is also worth noting that this case only looked at whether GST applied at the time of the sale.  However, the application of the change of use rules suggest that there could have also been income tax consequences at the time of the change of use.  Notably, while it was not covered by the case, there may also be income tax consequences of a change of use.  When there is a change in use of the property, the owner is deemed to sell the property at its fair market value and immediately re-acquire the property at fair market value, subject to some exceptions.[11] The taxpayer must then report the resulting capital gain or loss for income tax purposes meaning, if there is an unrealized capital gain, there will be income taxes payable. 

The TCC held that at the time of sale, the Condominium was not a “residential complex” as defined in subsection 123(1) of the Excise Tax Act because there was a change in use of the Condominium on February 25, 2017, and therefore, the Condominium was not exempt from GST/HST when it was sold. 1351231 Ontario Inc. has appealed the decision but it is yet to be heard by the Federal Court of Appeal.

Conclusion

Based on British Columbia’s new legislation and this decision out of the TCC, property owners may want to reconsider whether it is beneficial to own property that is being used as a short term rental. Based on 135 Ontario, the property may not be exempt from GST when it is sold. 

There also could be income tax risks associated with changing the use of a property from a long term rental to a short term rental. Additionally, under the Act, there are restrictions on what property can be used as short term rentals in some areas of British Columbia.

If you have concerns or questions about owning short terms rentals or otherwise, please don’t hesitate to reach our Corporate Commercial team or Tax team at McLennan Ross.