Beware: Selling an Airbnb Property in Canada May Trigger GST/HST

A Definitive Guide for Short-Term Rental Owners and Investors

If you own a property that has been rented on Airbnb, Vrbo, or other short-term rental platforms, you may be sitting on a “tax time bomb.” A recent landmark ruling from the Tax Court of Canada has sent shockwaves through the real estate industry, confirming that selling a property used primarily for short-term rentals can trigger a massive 13% HST liability (in Ontario) on the full sale price—even if that property was a standard residential home for years.

For a property sold for $800,000, this could mean an unexpected tax bill of $104,000 appearing at the closing table.

1. The Landmark Ruling: 1351231 Ontario Inc. v. His Majesty the King (2024)

To understand your risk, you must understand the case that changed the landscape. In 2024, the Tax Court of Canada ruled against a condominium owner in Ottawa who had converted their long-term rental into an Airbnb.

The Facts of the Case:

• 2008–2017: The owner leased the condo as a standard long-term residential unit (exempt from HST).
• 2017–2018: The owner switched to short-term rentals via Airbnb.
• The Sale: In 2018, the owner sold the condo and did not charge HST, believing it was still an “exempt residential complex.”

The Verdict: The Court agreed with the CRA, stating that because the property was being used like a hotel or lodging house at the time of sale, it no longer met the definition of a “residential complex.” Consequently, the sale was a taxable commercial supply.

2. Why Does the CRA Consider an Airbnb “Commercial”?

Under the Excise Tax Act, most “used” residential homes are exempt from GST/HST when sold. However, there is a critical exception. A property is not a residential complex if:

1. It is a hotel, motel, inn, or “similar premises.”
2. “All or substantially all” (90% or more) of the rentals are for periods of less than 60 days.

The Court has now explicitly ruled that Airbnb units are “similar premises” to hotels. If you are renting your unit nightly or weekly, you are likely operating a commercial lodging business in the eyes of the law.

3. The “Change-in-Use” Trap: A Deemed Repurchase

You don’t even have to sell the property to trigger a tax event. Under Section 206(2) of the Excise Tax Act, the moment you stop using a property for exempt purposes (long-term rental) and start using it for commercial purposes (Airbnb), you are hit with a “Change-in-Use.”

CRA treats this as if you sold the house to yourself at Fair Market Value (FMV) and paid the HST on it. While you may be able to claim Input Tax Credits (ITCs) to offset this, the paperwork is complex, and the penalties for missing this filing are severe.

4. New 2024-2025 Rules: Denial of Expenses

In addition to GST/HST risks, the Federal Government introduced a major change in 2024 regarding income tax deductions.

• Non-Compliant Rentals: If you operate an Airbnb in a city where short-term rentals are banned or if you fail to obtain a required municipal license, the CRA will now deny all your expense deductions.
• The Impact: You will be taxed on your gross revenue rather than your net profit. For many hosts, this effectively turns a profitable side-hustle into a financial loss.

5. HST and the Principal Residence Exemption

A common misconception is that the Principal Residence Exemption (PRE) protects you from all taxes. While the PRE can shield you from Capital Gains Tax (income tax), it provides zero protection against GST/HST (sales tax).

If you rent out your basement or a garden suite on Airbnb “all or substantially all” of the time, that portion of your home may be subject to HST when you sell the entire house.

6. How to Protect Yourself: Strategic Planning

If you are currently an Airbnb host or planning to sell a short-term rental, you must take these steps:

1. The “Purification” Strategy

The 2024 Court decision hinted that if a property is converted back to a long-term residential use before the sale, it may regain its exempt status. This requires careful timing and a formal lease agreement with a long-term tenant (over 60 days).

1. Voluntary Disclosure (VDP)

If you have been operating an Airbnb and failed to register for or collect HST (and your revenue exceeded $30,000 in a year), you may be eligible for the Voluntary Disclosure Program. This allows you to fix past mistakes and avoid criminal prosecution or heavy penalties.

1. Review Your Municipal Compliance

Ensure you have the proper permits. As of January 1, 2024, failing to follow local bylaws can result in the total denial of your mortgage interest, property tax, and utility deductions.

Summary Checklist for Property Owners

• Check your 12-month revenue: If it’s over $30,000, you MUST register for HST.
• Review your “Use” percentage: Is more than 90% of your rental time “short-term”?
• Verify municipal licensing: Are you compliant with local 2025 bylaws?
• Consult a CPA before listing: Do not wait until you have a signed offer to ask about HST.

How A&R LLP Supports Real Estate Investors

Navigating the intersection of the Excise Tax Act and the Income Tax Act is notoriously difficult. At A&R LLP Chartered Professional Accountants, we provide:

• GST/HST Exposure Audits: Determining if your upcoming sale will trigger a tax bill.
• Change-in-Use Filings: Managing the deemed disposition of your assets.
• Audit Defense: Representing you if the CRA challenges your “Residential Complex” status.

👉 Selling an Airbnb? Don’t leave 13% of your equity to chance. Contact A&R LLP for a Tax Review.