Offering short-term rental accommodation has become a popular means for property owners to earn additional income, particularly as online rental platforms have exploded in popularity. However, as housing availability and affordability have become contentious issues in Canada, governments have introduced changes to crack down on short-term rentals, including:
- Creating restrictions and licensing requirements for short-term rentals at the provincial and municipal levels, including the Short-Term Rental Accommodations Act or “STRAA,” which was introduced in British Columbia in May 2024; and
- Disallowing income tax deductions for expenses related to short-term rentals that don’t meet local licensing requirements.
As a result of these changes, owners of short-term rental properties may find themselves looking to exit the short-term rental market. Before they do so, however, they need to be aware of the GST/HST consequences of converting such properties to other uses.
Understanding the terminology
The term “residential complex” is one of the most important—and yet one of the most complicated and poorly understood—terms in the GST/HST legislation. Virtually any type of residential property (including a detached house, semi-detached house, rowhouse unit, condominium unit, mobile home, floating home, etc.) is considered a “residential complex” for GST/HST purposes if it is: a) occupied by an individual as a place of residence in continuous possession or use for a period of one month or more (i.e., a standard month-to-month or annual lease); or b) used as a place of residence by the owner or their family. However, that same property may not be considered a “residential complex” if it is not used as a place of residence and is instead offered for short-term rentals (such as an Airbnb or similar arrangement offered only for temporary or transient possession or use).
It’s vital that property owners understand these nuances because whether a property is, or is not, considered a “residential complex” is crucial in determining whether GST/HST will apply in the event of a sale or change in use.
GST/HST on hotel (or similar) conversions
The Excise Tax Act (ETA) contains rules that require property owners to self-assess and pay GST/HST on the fair market value of real property that becomes a “residential complex” after being held for use as capital property in a business or commercial activity. For example, if a property owner converts their Airbnb nightly rental to a tenanted property with a monthly lease arrangement, they may find themselves facing a GST self-assessment obligation, because they are deemed to be the “builder” of the property and to have “substantially renovated” it. A similar rule requires a self-assessment of GST/HST where the property is appropriated by an individual owner for their personal use or enjoyment.
The requirement to self-assess GST/HST on a property that becomes a residential complex (including becoming the owner’s principal residence) cannot be deferred even though the owner has no cash flow arising from the conversion to fund the GST/HST owing. Moreover, the GST/HST New Housing Rebate, which was intended to provide partial relief in these situations, isn’t available for properties valued above $450,000 (a threshold set in 1991 that has never been adjusted for inflation).
Properties used for short-term rentals
A suite or room in a hotel, motel, inn, boarding house, or lodging house may be considered a residential complex if it is used by an individual as a place of residence, but there is an important exclusion in the definition that can apply to these kinds of properties (and others, if they are used like a hotel) called the “hotel exception.” This exception, which excludes a property from being considered a residential complex, is essentially a two-part test:
- The property must be a hotel, motel, inn, boarding house, lodging house, or other similar premises; and
- All or substantially all of the leases, licences, or similar arrangements under which residential units in the building are provided are for periods of continuous possession or use of less than 60 days.
Where these two conditions are met, the property will not be considered a residential complex for GST/HST purposes, and GST/HST will be triggered if the property is sold or converted for use as a residential complex.
CRA guidance on the meaning of “hotel” and similar premises
The difficulty in applying the hotel exception to properties used for short-term rentals often lies in whether the property meets the first condition of the hotel exception. In GST/HST policy statement P-099, the CRA provides the following guidelines for determining if a “residential complex” or “residential unit” will be considered a hotel or “similar” property:
- “the establishment normally provides temporary accommodation rather than a permanent place of residence;
- where required by municipal and/or provincial regulations, the establishment is licensed for business for the purpose of providing a temporary place to stay;
- the establishment is available for rental to the public on a temporary [transient] basis; […]
- where appropriate, there is a common registration area;
- the rooms or suites in the establishment are furnished by the supplier;
- depending on the nature of the establishment, housekeeping services and other facilities are available such as restaurants, meeting rooms, stores, etc.”1
The CRA document, which was issued in 1993, further states that while all six of these conditions do not need to be present for the property to be considered similar to a hotel, where they are applicable, these conditions should “generally be present throughout the year.”
In a technical interpretation issued in 2003,2 the CRA provided further clarity by indicating that vacation properties used for short-term rentals on a seasonal basis will not be considered similar to hotels for the purposes of the hotel exception if they are used for long-term rentals or personal use for the remainder of the year. However, it’s unclear how much personal use of a vacation property would be required to avoid the hotel exception, or where the CRA will draw the line.
It’s important to note that the CRA generally ignores periods of vacancy when analyzing the use of a property and in determining its status as a hotel or similar premises. Where there is significant doubt, property owners should seek tax advice from an expert. It may also be prudent to seek a GST/HST ruling from the CRA.
Case sheds light on “hotel exception” and “all or substantially all” tests
The second part of the hotel exception relates to whether “all or substantially all” of the rentals of the property are for periods of less than 60 days. A recent decision in the Tax Court of Canada addressed the GST/HST status of a residential condominium unit that had been rented on a long-term basis for nine years, then used as a short-term rental property for 14 months, and then sold.3
In determining whether “all or substantially all” of the leases of the property in question were for periods of less than 60 days, the judge indicated that we need to look only at the current use of the property and not the total use of the property over the entire period of ownership. The judge also noted that because the change-in-use rules result in the deemed acquisition of a property where the owner begins using it for a commercial purpose, the use of a property before such a point in time is irrelevant in applying the “all or substantially all” test.
The case, which is under appeal at the time of this writing in late November 2024, also confirms that a property need not have all the hallmarks of a hotel to be considered a hotel for GST/HST purposes. Instead, a residential property will be considered “similar” to a hotel for GST/HST purposes if it is used like a hotel. The residential condominium in this case was rented on a furnished basis for terms of less than 60 days (and even as short as one night), and internet access was provided. The Court ruled that a change in use and deemed acquisition occurred when the property was offered for short-term rental, and that the hotel exception applied to the property for the 14 months before its sale. This meant that the property was not a residential complex at the time of the sale and, therefore, was not exempt from GST.
Key takeaways
The conversion of short-term rental properties for use as long-term residential rentals or personal use properties will often result in a requirement for the owner to self-assess GST/HST on the property’s fair market value. In addition, the sale of a residential property that has been used to offer short-term rental accommodation and does not meet the definition of a “residential complex” is a taxable sale for GST/HST purposes.
GST/HST issues should be carefully considered any time there is a sale or change in use of real property in Canada, and property owners would be wise to seek advice from a GST expert. Even partial changes in use, which are beyond the scope of this article, can have major GST/HST implications. Property owners who fail to correctly comply with the GST/HST rules can face serious consequences, including being assessed for the unpaid tax plus interest and penalties.
Cameron Reid, CPA is a senior tax manager with D&H Group in Vancouver, where he assists clients with personal and corporate tax planning. Cameron has experience in a wide variety of sectors and specializes in GST/HST. Photo by Alastair Bird Photography.
This article was originally published in the January/February 2025 issue of CPABC in Focus.
Footnotes
1 CRA, GST/HST policy statement P-099: “The Meaning of ‘Hotel,’ ‘Motel,’ ‘Inn,’ ‘Boarding House,’ ‘Lodging House’ and ‘Other Similar Premises,’ as used in the definition of ‘Residential Complex’ and ‘Residential Unit,’” canada.ca. Accessed November 26, 2024.
2 Taxnet Pro, “43557 – GST/HST Interpretation—Seasonal Leases,” GST Headquarters Letters, 2003.
3 Tax Court of Canada, 1351231 Ontario Inc. v. The King, 2024 TCC 37, decision.tcc-cci.gc.ca. Accessed November 26, 2024.
