In March 2025, the Federal Court of Appeal delivered the judgment on 1351231 Ontario Inc. v The King, 2025 FCA 53, dismissing the appeal by the taxpayer to the decision of the Tax Court of Canada in 1351231 Ontario Inc. v The King, 2024 TCC 37. GST/HST is confirmed to be collectible on the sale of the condominium unit owned by the taxpayer and used for short-term rental through Airbnb listing.

Background – Condo for lease as a business

The taxpayer, 1351231 Ontario Inc., was incorporated by two brothers, and is a GST/HST registrant. In February 2008, the corporation purchased a used condo unit and used it exclusively to lease to earn rental income. From February 2008 to February 2017, the condo unit was used exclusively for long-term leases, each lease exceeding 60 days. From February 2017 to April 2018, the condo unit was listed on Airbnb and used exclusively for short-term leases, most of the leases for less than seven nights and many for only one night.

The corporation listed the condo unit for sale in December 2017. A sale and purchase agreement was entered into in January 2018, and the sale closed in April 2018. GST/HST was not remitted, and the CRA later assessed the corporation for $77,000 GST/HST collectible on the sale. The issue before the court was whether the sale of the condo unit at issue was a taxable supply.

The sale of the condo unit was a taxable supply, unless exempted

Taxable supply is defined in subsection 123(1) of the Excise Tax Act as a supply made in the course of commercial activity, unless exempted. It was not contested that the sale of a real property is a supply; the issues were whether the sale was exempted and whether the sale was made in the course of commercial activity. The taxpayer relied on the two following exemptions provided in Part I of Schedule V of the Excise Tax Act:

  1. Section 2 exempts the sale of a “residential complex” by a non-builder from GST/HST.
  2. Section 6 exempts the residential lease for continuous occupancy of at least a month from commercial activities subject to GST/HST.

Condo unit used for short-term leases is not a residential complex

Section 2 of Part I of Schedule V of the Excise Tax Act provides that the sale of a “residential complex” by a non-builder is an exempt supply, unless the non-builder already claimed input tax credit (ITC) from the last acquisition of the property or from an improvement to the property.

Since the corporation bought a used condo unit, it is not contested that the corporation was not the builder of the property. The corporation did claim input tax credits on the furniture purchased for and the paint job done on the unit. While buying furniture is not an improvement, the paint job could be. Nevertheless, the parties already agreed that the particular paint job done on the unit was not an improvement. The remaining question is whether the condo unit is a “residential complex.”

Residential complex is defined in subsection 123(1) of the Excise Tax Act as either one of the following:

  1. Whole or part of a semi-detached house, rowhouse unit, residential condominium unit, or a similar premise;
  2. A part of a building where one or more residential units are located; or
  3. A building owned by an individual and used primarily as a place of residence of the owner or an individual related to the owner.

It is clear that the condo unit at issue is a residential complex per the first test of the above definition. However, subsection 123(1) also carves out certain properties from the definition. Specifically, where a property satisfies all the below conditions, it is not a residential complex, and as a result, the sale of the property is not exempted and is a taxable supply:

  1. The property is not a building owned by an individual and used primarily as a place of residence of the owner or an individual related to the owner;
  2. The property is a hotel, motel, inn, boarding house, lodging house, or a similar premise; and
  3. All or substantially all of the leases are for periods of continuous possession or use of less than 60 days.

It is clear that the condo unit satisfies the first condition, since it is not a building and not owned by an individual.

On the second condition, the Tax Court determined that the condo unit in question is similar to a hotel or motel. It was leased on a short-term and furnished basis, with all utilities, such as water, heating, air conditioning, electricity, and internet, fully covered.

The knowledgeable Canadian tax litigation lawyer for the corporation argued that the building where the condo unit is located does not have a restaurant like most hotels or motels do. The Tax Court rejected this argument because food is non-essential to the lodging and is rarely included in the fees charged by hotels or motels.

On the third condition, the corporation argued that the determination must be made on the whole period when the property was owned. The condo unit was leased out on a long-term basis for 9 years from February 2008 to February 2017, whereas it was leased out on a short-term basis for only 14 months from February 2017 to April 2018.

As such, substantially all of the leases were long-term, longer than 60 days. The Tax Court, however, rejected this interpretation, holding that the determination must be made at the time when the sale was made. When the condo unit was sold, it was used for short-term leases, most of the leases for less than seven nights and many for only one night, thereby satisfying the last condition.

Overall, the Tax Court found that the condo unit met all the conditions of the carved-out from the definition of a residential complex, meaning the condo unit was not a residential complex. Therefore, its sale is not exempted and is a taxable supply subject to GST/HST.

There was a change-in-use from short-term to long-term lease

Section 6 of Part I of Schedule V of the Excise Tax Act provides that residential rent for continuous occupancy of at least a month is exempted from commercial activities subject to GST/HST.

If this section applied, the corporation would not conduct commercial activity with the condo unit and the sale of which would not be in the course of commercial activities, effectively making it a non-taxable supply.

The corporation relied on subsection 206(2) and section 197 of the Excise Tax Act to argue that there was a change in use of the condo unit from long-term to short-term leases and the change was insignificant. Specifically, section 197 provides that where the change is less than 10%, it is insignificant and the character of the activity for the whole period remains as before the change. As such, the leasing activity remained long-term and was thus not a commercial activity.

It was not contested that there was a change in the use of the condo unit in February 2017 and that at the time of sale, the condo unit was used for short-term leases. The remaining question was whether the leasing activity retained the long-term characteristic as before the change.

Recall that the condo unit was leased out on a long-term basis for 9 years from February 2008 to February 2017, whereas it was leased out on a short-term basis only for 14 months from February 2017 to April 2018.

The corporation argued that the determination must be made on the whole period when the property was owned. Since the period for short-term leases represents only 9.9% of the whole period when the property was owned, the change was insignificant and thus the whole period when the property was owned must be characterized as of long-term lease.

The Tax Court rejected this interpretation, holding that the determination must be made at the particular time when the change took place, and the extent of the change is based on the level of activity before and after the change. In this case, the activity changed from 100% long-term lease to 100% short-term lease in February 2017.

The change was significant, so the leasing activities after the change took on a new characteristic, i.e. short-term, less than a month for each lease. Therefore, the leasing of the condo unit was a commercial activity, and the sale made during the course of the commercial activity was a taxable supply subject to GST/HST.

Final Outcome – No exemptions applied

Taking everything together, the Tax Court found that none of the exemptions applied to the sale of the condo unit that was owned by the corporation and used for short-term leases through Airbnb listing.

Consequently, the sale was a taxable supply and the CRA was correct in assessing GST/HST collectible from the sale. The taxpayer appealed to the Federal Court of Appeal, which subsequently found no reviewable error in the decision of the Tax Court and dismissed the appeal.

Pro Tax Tip – Sale of residential unit used for Airbnb is subject to GST/HST

This case carefully examines the framework to determine whether the sale of a rental property is a taxable supply subject to GST/HST. It provides a number of important reminders for those who are looking to sell their rental properties.

If the property is used as a residence of the individual owner or someone related to the owner, it is considered a “residential complex,” and the sale is an exempt supply, not subject to GST/HST. Otherwise, if the property is used for long-term lease (longer than 60 days), it is also considered a residential complex.

If it is used for leases that are less than 60 days, it is carved out from the definition of residential complex and its sale is taxable supply subject to GST/HST. However, when the leases are less than 60 days but at least a month, the leasing activity is exempted from commercial activities subject to GST/HST.

Hence, the sale of the rental property is not a taxable supply. Finally, where the leases are short-term, less than a month (such as in the case of Airbnb), the leasing is a commercial activity, and the sale of the property is a taxable supply.

There are other carve-outs and exemptions that might be available to taxpayers and the rules are complex. It is advisable that the taxpayers discuss with experienced Canadian tax lawyers to understand GST/HST as well as income tax obligations when selling a rental property.

FAQ

My corporation built this rental property and the leases were all long-term. Does it mean the sale is an exempt supply?

No. Long-term lease is not the only condition to avail of the residential complex exemption. Other conditions include, inter alia, that the vendor must not be a builder and that the vendor did not claim input tax credits (ITC) on the last acquisition of the property or from an improvement to the property. These are complex questions of facts and laws and should be examined by experienced Canadian tax lawyers before coming to a conclusion.

My corporation converted this rental property from long-term lease to short-term lease for a brief period before selling. Can this be considered a change in the use of the property?

Please be mindful that the change-in-use rule looks at the extent of the use of the property before and after the change, not the period of the change compared to the whole period when the property is owned.

If the extent of the change is less than 10%, the change is insignificant, and the use of the property will be treated as if there was no change. Otherwise, the change is significant and the use of the property for the period after the change is characterized by the new pattern of usage. This can be quite different from how you would normally interpret the wording of the rule. It’s best to consult with experienced Canadian tax lawyers before coming to a conclusion.

DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.