(a) Background

When is the sale of used residential housing taxable for goods and services tax/harmonized sales tax (“GST/HST”) purposes? This issue was addressed by the Tax Court of Canada (the “TCC”) in 1351231 Ontario Inc.,¹ which considered the application of GST/HST to the sale of a used condominium unit by its owner, a GST/HST registered corporation (the “Owner”).

The Owner purchased a condominium unit as an investment property and rented it under long term leases (i.e., more than 60 days) to third parties on a GST/HST exempt basis for approximately nine years. However, for the next 14 months, the taxpayer listed and leased the furnished unit (which included heating, air conditioning, Wi-Fi access and electricity) on Airbnb under a number of short-term rentals (i.e., periods of less than one month) before selling the unit to an arm’s-length purchaser. Neither the taxpayer nor the purchaser remitted GST/HST on the sale of the condominium unit.

(b) The issue

The main issue for the TCC to determine was whether the condominium unit was a “residential complex” as defined in the Excise Tax Act (Canada) (“ETA”). The sale of a used residential complex is generally exempt from GST/HST under section 2 of Part I of Schedule V to the ETA if the seller (i) is not a builder and (ii) did not claim input tax credits in respect of its last acquisition of the complex. However, the following is carved out from the definition of “residential complex”:

• a building, or that part of a building, that is a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises, or the land and appurtenances attributable to the building or part, … and all or substantially all of the leases, licences or similar arrangements, under which residential units in the building or part are supplied, provide, or are expected to provide, for periods of continuous possession or use of less than sixty days.

(c) The decision

The Court considered the Owner’s activity and found that the unit was not a “residential complex” because, at the time of sale, which the court concluded was the relevant time to make this determination, (i) the unit was similar to a hotel, motel or similar premises since it was listed on the Airbnb platform for lease as a short-term rental and leased on a furnished basis, including heating, air conditioning, Wi-Fi access, etc. (the fact that there was no restaurant or food available on the premises was irrelevant); and (ii) all or substantially all of the leases, under which the unit was supplied were for periods of less than 60 days, as the Owner exclusively rented the property under short-term leases since it was listed on the Airbnb platform.

In reaching its decision, the TCC considered the change-in-use rules for real property in subsection 206(2) of the ETA, which apply when a registrant begins to use, at a particular time, real property previously acquired for use in non-commercial activities as capital property for use in its commercial activities.² Under the change-in-use rules in subsection 206(2), the registrant is deemed to have received a supply of the property by way of sale when it begins to use the property in its commercial activities. The Court concluded that the Owner began to use the unit in commercial activities on the date it listed the unit on the Airbnb platform for lease as a short-term lease and therefore, the change-in-use rules were triggered on that date.

The Owner argued that the change-in-use rules did not apply because of section 197, which provides that the change-in-use rules do not apply where the cumulative change in use between the time that a registrant last acquired real property, and a specific point of time is less than 10 percent. According to the Owner, the relevant period to measure the change-in-use was from the date it originally acquired the unit to the date it sold the unit. Consequently, the Owner maintained that the number of days that it made taxable rentals of the unit to the total number of days it owned the unit was less than 10% so that the change in use rules did not apply.

The TCC rejected the Owner’s argument noting that section 206 refers to a change in use that occurs “at a particular time” and it is necessary to consider the extent of that change of use at that time to determine whether a supply is deemed to have been made or received. Accordingly, the Court held that the change-in-use rules must be considered (i) at a specific point in time, and (ii) each time a subsequent change in use occurs. While the Court agreed that section 197 works with section 206 to limit the application of the change-in-use rules to “individual changes in use that cumulatively are at least 10%,” the Court concluded section 197 clearly did not apply in the current case because the change in use on the date the property began to be used to make short term rentals (i.e., the particular time) was 100%.

In considering whether “all or substantially all” of the leases were for less than 60 days, the TCC confirmed that the determination must be made at the time of sale. The Court rejected the Owner’s argument that the “all or substantially all” test was to be applied to the total period that the Owner owned the unit stating:

I do not accept the Appellant’s argument. The definition of residential complex contains no time stamp because the definition does not require a time stamp. The determination is not made over a period of time. The determination of whether the all or substantially all test applies is made based on the use of the Condominium at the time that the Condominium was sold.³

The TCC added that it must determine whether, at the time of sale, the supply of the unit was exempt under section 2 of Part I of Schedule V or taxable, which depended upon whether the unit was a “residential complex.” As the TCC determined that the unit was similar to a hotel, motel or similar premises enumerated in the exclusion from “residential complex” and all or substantially all of the leases of the unit were for more than 60 days, the condominium unit did not qualify as a “residential complex” under the ETA and therefore the sale of the unit was subject to GST/HST.

(d) Key takeaways

• The relevant time to consider the use of a residential property and whether it qualifies as a “residential complex,” in order to determine whether a supply of the property is taxable or exempt, is at the time the property is sold, not throughout the entire time that the property is owned by the supplier.
• A residential unit listed on a short-term rental platform that is leased on a furnished basis will generally be considered similar to a hotel, motel or similar premises and therefore not qualify as a “residential complex” for GST/HST purposes.
• Anything done by a person in connection with the establishment of a commercial activity of the person is deemed to have been done by the person in the course of the person’s commercial activities including listing a residential condominium unit on an online platform for short-term rentals.
• The change-in-use rules for real property must be considered each time there is a change-in-use from commercial to non-commercial activities or vice versa as they may trigger an entitlement to claim input tax credits or a requirement to self-assess tax. The cumulative changes in use must be considered each time there is a change in use to determine whether the “de minimis” 10% rule in section 197 applies.
• It is important for vendors and purchasers to carefully consider the GST/HST rules on the sale of residential property. Where a vendor incorrectly states or certifies that it is making an exempt supply of a residential property where the supply of the property is actually taxable, the sale price is deemed to include the GST/HST payable, therefore reducing the consideration received by the vendor.

It should be noted that as of the date of this publication, the decision discussed above has been appealed to the Federal Court of Appeal. It will be interesting to see the Federal Court of Appeal analysis on the issues, although we do not anticipate that the decision will be reversed.

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By Randy Schwartz, Kassandra Grenier, Hubert Cadotte.