A recent tax court ruling could have a big effect on your bottom line if you rent out your house on Airbnb or other short-term rental websites. According to this recent ruling, some Canadian short-term rental properties may be subject to a hefty 13% HST tax on the full transaction price, which many owners may not have anticipated. This is what transpired and what it means for Canadian investors, sellers, and homebuyers.
The Tax Court's Conclusion: A Revolution in Short-Term Rentals
The Tax Court of Canada decided in a landmark case that landowners who regularly rent out their homes for short periods of time (for example, on Airbnb or VRBO) may be required to pay HST upon selling. These facilities are now taxed more like hotels or inns as a result of this verdict, which changes their perspective from residential to commercial.
What Does This Tax Cover?
- HST of 13% on the sale price: The 13% HST is applied to the full sale price of short-term rental properties, which might result in a tax payment of tens or even hundreds of thousands of dollars.
- Property Types Affected: This tax applies to single-family homes, townhomes, and condos that are regularly rented on short-term platforms. A change to short-term use prior to a sale may result in HST even if the property was initially rented out for a lengthy time.
A True Example of How One Airbnb Host Was Affected
Consider a condo owner in Ottawa who first rented out his property for a long period of time, from 2008 to 2017. However, things changed in 2017 when he started using Airbnb for short-term rentals. Prior to selling his house in 2018, he made $11,200 from Airbnb in 2017 and $43,179 in 2018. The owner received a $77,079.64 HST bill from the Canada Revenue Agency (CRA) following the transaction. The property's classification change from residential to commercial use—an expensive lesson in the tax ramifications for hosts of short-term rentals—was the cause of this substantial bill.
What This Signifies for Investors, Buyers, and Homeowners
- Buyer: If buying a house that has been used for short-term rentals in the past, buyers should be mindful of the tax ramifications.
- Current Owner: If current owners intend to sell, they should think about how switching to short-term rentals could result in high taxes.
- Investor: Because the possible tax implications may change return expectations, investors may need to reconsider their short-term rental property strategy.
Important Takeaways
- Since long-term rentals are still regarded as residential, they are typically exempt from this tax.
- Because the court believes that short-term rentals have a business purpose, they are subject to the HST if they are sold.
- Tax-Free Route: Reverting the property to long-term rental status before listing it could be one possible workaround if you're thinking about selling. Although not infallible, this tactic might aid in avoiding HST.
Remain Informed and Educated
Follow our blog for frequent real estate information or contact us with any real estate needs; we're here to assist you in navigating these changes. Stay up-to-date on the latest regulations affecting short-term rentals.