New CRA Ruling: Hosts Must Pay 13% HST on Short-Term Rental Property Sales

In a recent decision, the Canada Revenue Agency (CRA) has clarified its stance on short-term rental properties and taxation. This ruling could mean substantial tax implications for hosts who have used their properties primarily for short-term rental. Here’s a breakdown of what this new development means for property owners:

If a property has been used at least 90% of the time for short-term rentals, such as an Airbnb, the CRA now requires a 13% Harmonized Sales Tax (HST) to be paid upon the sale of that property. This tax is calculated based on the full sale price, adding a significant amount to the seller’s cost. For instance, on a property sold for $1 million, this translates to $130,000 in HST.

Properties rented on a long-term basis, or for periods exceeding 28 days, retain their classification as residential and are exempt from this additional HST charge. Long-term rentals meet the CRA’s criteria for residential use, avoiding the HST that applies to short-term rental properties.

The CRA views short-term rentals as comparable to hotel or lodging businesses. Since these rentals operate on a model similar to a hotel, with high turnover and transient guests, they are now subject to HST in much the same way as commercial lodging.

Hosts are also required to collect and remit HST on each rental transaction, adding to the CRA’s revenue. The cumulative impact of these taxes underscores the government’s stance on regulating short-term rentals more closely, likely in response to the increasing prevalence of these rental types.

Although this law is not new, the recent court decision highlights its enforceability after an owner attempted to dispute it. The ruling serves as a reminder that this HST requirement has been on the books and is enforceable. It aligns with the government’s goal to regulate short-term rentals and treat them akin to commercial operations.

In addition to the HST, short-term rental property sellers may also face increased capital gains taxes, another financial consideration for hosts. Together, these costs can substantially impact overall profitability from the sale.

The CRA has a four-year window from the date of assessment to reassess an HST return. However, in cases of gross negligence—such as failing to report the sale of a real estate asset—the agency can extend this timeframe beyond the typical four-year period. For personal income tax returns, this review period is limited to three years.

For property owners planning to sell a property used primarily as an Airbnb or other short-term rental, consulting a tax professional is crucial. Given the intricacies of the CRA’s requirements and the potential financial implications, professional advice can help avoid costly missteps and ensure compliance with current tax laws.

This ruling underscores the need for property owners to stay informed of tax requirements related to short-term rentals. As regulations evolve, keeping abreast of these changes is vital to making informed, profitable decisions about property use and sale.