GST/HST Issues Ahead For Short-Term Rentals

Cities and provinces in Canada are increasingly restricting Airbnb and other short-term rentals. Now, a new federal government measure will increase the pressure further. These changes could lead to GST/HST consequences for property owners.

In last month's Fall Economic Statement, the federal government announced that property owners will not be permitted to deduct expenses for short-term rentals that violate local laws. At the same time, the income from these short-term rentals will remain taxable. This new rule is intended to come into effect January 1, 2024.

The federal government's announcement gives an example of how the new rule will work. In the example, an investor owns three condos, and earns about $120,000 in revenue per year from short-term rentals. The investor's expenses are also $120,000 per year. The investor operates the condos in violation of local regulations. Under current rules, the investor earns no profit and pays no income tax. Under the new rule, the investor can no longer deduct the $120,000 in expenses. As a result, the investor will have to pay income tax on $120,000 of revenue, estimated to be about $33,100.

The federal government's announcement says this new rule "provides a strong incentive for operators of non-compliant short-term rentals to return those properties to the long-term housing market."

Unfortunately, owners of short-term rentals may face significant GST/HST liability when they move their properties to the long-term housing market. Sections 190 and 191 of the Excise Tax Act may impose sales tax when a property owner begins using their property as long-term residential property after previously using the property all or substantially all the time in commercial activities. If applicable, sales tax is calculated on the fair market value of the property. New housing GST/HST rebates would be available. However, new housing rebates will generally cover only a small part of the sales tax applicable to most properties.

Several issues may arise for the CRA in enforcing the new rule and for investors who return properties to the long-term housing market. For example, it is unclear how the CRA will determine whether or not a particular short-term rental has violated a local bylaw. Then, if property owners convert a short-term rental property to long-term use, it may be unclear whether or not the property previously was used all or substantially all of the time in commercial activities. Likewise, the fair market value of the property (and therefore any sales tax owing) may also be a subject of debate between the CRA and property owners.

The federal government has yet to publish the draft legislation enacting its new rule. It remains to be seen if the government will take these potential GST/HST consequences into account in implementing this measure.