GST Consequences For Short-Term Rental Property Explained

In a previous article, we flagged the potential GST/HST consequences when a person returns a short-term rental property to long-term residential use.

In this article, we will discuss those consequences in more detail. We will discuss four scenarios: Selling the property, renting the property to a long-term tenant, moving into the property personally, and leaving the property vacant.

Please note this is only general information. The GST/HST rules for real estate are complicated. Whether GST/HST applies can depend on the particular facts of a taxpayer. Property owners should get advice from a knowledgeable tax professional about their own situation.

Does GST/HST apply if I sell a property used for short-term rentals?

Generally, the sale of used residential real estate is not subject to GST/HST.[1] However, there are two important exceptions to this general rule:

• The sale of a used residential property will be taxable if the owner has claimed an input tax credit for the GST/HST paid on the purchase of the property or improvements to the property.[2]
• The sale of a used residential property may be taxable if the owner has substantially renovated the property since the property was acquired.[3]

Apart from these general exceptions, owners of short-term rentals should consider another rule. A short-term rental property may no longer be considered residential property (under the Act, a “residential complex”). If so, the short-term rental property would be taxable as with other commercial property. We will discuss this below, under "Is my property still a residential complex?".

Does GST/HST apply if rent the property to a long-term tenant?

Two important rules may apply when a short-term rental property owner begins renting the property out to a long-term tenant.

First, the "change of use" rules may apply.[4] These rules, in effect, require a person who was using a property for commercial purposes and stops or reduces their commercial use of the property to pay the GST/HST that the person has paid on the property and, presumably, has previously claimed back. The amount of GST/HST owed is calculated based on any GST/HST paid to acquire the property or to make improvements to the property.[5] If the person purchased the property as used residential property (and therefore didn’t pay tax), or hasn’t made any significant improvements, the amount of GST/HST owing by these rules may be relatively small.

Second, if the property is no longer considered a residential property, renting it out will trigger GST/HST calculated on the fair market value of the property.[6] Again, we will discuss whether a property is still residential below under “Is my property still a residential complex?".

The tax under the above two rules is integrated.[7] Property owners will effectively only pay the higher of the two potential amounts of GST/HST owing.

Does GST/HST apply if I move into the property?

The rules that apply to occupying the property personally have generally similar consequences to the rules that apply to renting the property out to a long-term tenant.[8]

Does GST/HST apply if I leave the property vacant?

Generally, vacancy is ignored when determining the use of a property for purposes of GST/HST.[9] Therefore, leaving a property that was used for short-term rentals vacant should, in principle, not trigger GST/HST consequences immediately. That said, we are not aware of any CRA guidance or case law specifically addressing the scenario of leaving a short-term rental property vacant.

Even if GST/HST consequences do not apply immediately to a vacant property, consequences may still arise at a later point if the property is sold, rented out, or occupied by the owner.

Property owners should also consider other laws that may apply to vacant property, such as a provincial or municipal vacancy tax.

Is my property still a residential complex?

It should be clear by now that the question of whether a property is still a residential complex is important for determining the GST/HST consequences from selling, renting, or occupying the property.

The Excise Tax Act uses the term "residential complex" to refer to residential property. It is important to know that, under the Act, a "residential complex" does not include "a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises" where all or substantially all of the rentals are for less than 60 days.

It is a difficult question whether a short-term rental property is a “hotel” or “similar premises”. The CRA has published a policy, P-099, with its interpretation. This policy refers to a number of factors, including the owner's intention, whether the property is furnished, and whether the property is normally available for rental to the public. The policy also indicates that a property generally has to have the features of a hotel throughout the year to cease qualifying as a residential complex.

To our knowledge, there are two Tax Court cases directly considering this question.[10] Both cases are under the Tax Court's "informal procedure", meaning they do not have precedential value. Both cases involved condos used exclusively for ski rentals. Both cases determined the properties were no longer a "residential complex".

In short, whether a property is a residential complex can be ambiguous and likely has to be determined on a case-by-case basis. The owner’s long-term intentions for the property, the owner’s occupancy of the property, and the use of a property throughout the year are all likely to be important factors.

What happens if I later return to short-term rentals?

If a property owner incurs GST/HST when they transition a property to long-term residential use, and they later return the property to short-term rentals, they can likely recover some or all of the GST/HST they have paid.[11]

If GST/HST applies, or if the CRA reassesses me, how can I mitigate the consequences?

If a property owner is reassessed GST/HST on a short-term rental property in one of these scenarios, they should make sure the rules in fact apply to their particular situation. Property owners should seek out accountants or lawyers who are knowledgeable about GST/HST. These rules are highly technical and can catch taxpayers and accountants off-guard.

Property owners should also ensure that the fair market value of the property used by the CRA is accurate and is not overstated. It may be useful to get an appraisal of the property to demonstrate the property’s fair market value.

Depending on the value of the property and the province, partial rebates may be available if GST/HST is triggered by rental, sale, or owner-occupancy. Property owners should ensure they apply for the rebates available to them.

Lastly, property owners should consider if they have claimed back all of the available GST/HST (as an input tax credit) that they can, based on what they paid for the property or on improvements to the property. Depending on how much time has passed, it may still be possible to claim those input tax credits.

[1] Excise Tax Act, Schedule V-I-2. All references below are to the Act.

[2] Schedule V-1-2(a).

[3] The precise timing of the tax liability may vary. In general, the rule is triggered on the earlier of a) a sale of the property b) giving possession or use of the property through a lease or similar arrangement for the purpose of occupancy by an individual as a place of residence or c) the owner occupying the property as a place of residence. See subsection 191(1).

[4] Subsections 206(4), 206(5), 207(1), or 207(2). 

[5] See the definition of “basic tax content” in section 123.

[6] Subsection 190(1) will be triggered to deem the person to be a builder and to have substantially renovated the property. When the property is rented out, the rules in s. 191(1) will be triggered.

[7] This is the effect of s. 195.1. 

[8] An individual moving in will trigger s. 190(2), instead of s. 190(1), which has an exception for personal use. The integration with the change of use rules is accomplished by the calculation in s. 207(1) and (2).

[9] See e.g. McKay v. The Queen, 2000 CanLII 234 (TCC).

[10] Wotherspoon v. The Queen, 2011 TCC 343, affirmed by the Federal Court of Appeal in Wotherspoon v. Canada, 2012 FCA 271; Koppert v. R., 1998 CarswellNat 2478, 99 G.T.C. 3042 (Tax Court of Canada).

[11] In general, property owners who begin using property for commercial purposes can reclaim GST/HST that they have paid to acquire or improve the property: Subsections 206(2) and (3) and 208(2) and (3). Owners who paid GST/HST because they rented or occupied a property would be considered to have acquired that property at the time of the rental or occupancy. Thus, they can in general claim back that GST/HST when they begin using the property for commercial activity.