Issue 2025-13

In brief

What happened?

On March 4, 2025, the Federal Court of Appeal (FCA) rendered its judgement in 1351231 Ontario Inc. v. The King, 2025 FCA 53. The FCA dismissed the taxpayer’s appeal, finding that the Tax Court of Canada (TCC) had not made a reviewable error when it determined that goods and services tax/harmonized sales tax (GST/HST) was payable on the sale of a residential condominium unit that was, before its sale, being used as a short‑term rental property and offered for lease on a digital accommodation platform.

Why is it relevant?

This decision should caution owners of used residential properties who are considering listing their property as a short-term rental on a digital accommodation platform. This is because that action could result in GST/HST being payable on a future sale of the property, which may reduce the value of the property by the amount of GST/HST (i.e. 13/113^ths for Ontario properties). This action may also result in GST/HST being payable pursuant to deemed sale rules that apply to properties that are converted to a residential complex at a later date.

Actions to consider

Residential property owners should consider the GST/HST implications of renting their property on a short‑term basis. Persons acquiring residential property should consider whether the sale is subject to GST/HST (which would make them responsible for paying it) and take this into account when negotiating the purchase, including how they can shield themselves from a potential GST/HST liability when a vendor certifies that the sale is exempt.

In details

Facts

In 2008, the corporate taxpayer purchased a used condominium unit located in Ottawa, Ontario. GST/HST was not paid on the purchase, because the sale of a residential complex by a person that is not a builder is generally exempt from GST/HST. From 2008 to February 2017, the taxpayer leased the condominium pursuant to a series of long‑term leases, each of which was for a period that exceeded 60 days. GST/HST was not payable on the leases, because the condominium was considered a “residential complex” and it was being leased for the purpose of its occupancy, as a place of residence or lodging by an individual for periods of at least one month.

In February 2017, the taxpayer listed the condominium on a digital accommodation platform and rented out the property through a series of short‑term leases, earning income of $11,200 in 2017 and $43,179 in 2018. While being leased on a short‑term basis, the condominium was furnished and the occupants were provided with heating, air conditioning, electricity and access to Wi‑Fi.

The taxpayer was registered for GST/HST and claimed input tax credits to recover the GST/HST that was paid to purchase furniture in December 2016 and to paint the condominium in January 2017. The final rental reservation was on February 26, 2018, for a period of 31 days.

On December 12, 2017, the taxpayer listed the condominium for sale and entered into an agreement of purchase and sale with an arm’s length purchaser on January 24, 2018. The condominium was sold to the purchaser on April 11, 2018.

GST/HST was not collected on the sale and it does not appear that the taxpayer certified, in accordance with section 194 of the Excise Tax Act (ETA), that the sale was exempt from GST/HST. The Canada Revenue Agency assessed the corporation $77,079 for failing to collect and remit GST/HST on the sale of the condominium. The taxpayer appealed to the TCC.

Tax Court of Canada’s decision

The primary issue for the TCC (and the only issue considered by the FCA, below) was whether the sale of the condominium was exempt from GST/HST, pursuant to section 2 of Part I of Schedule V to the ETA, on the basis that the condominium was a “residential complex,” as defined in ETA subsection 123(1). A “residential complex” can include various types of properties, including a residential condominium unit, a residential unit (e.g. detached and semi‑detached houses, rowhouse units, etc.) and mobile homes. However, it also expressly excludes a building (or part of a building) that is, in most situations, a “hotel, a motel, an inn, a boarding house, a lodging house or other similar premises” where “all of the leases, licences or similar arrangements, under which residential units in the building or part are supplied, provide, or are expected to provide, for periods of continuous possession or use of less than sixty days” (the Hotel Exclusion).

The TCC held that the Hotel Exclusion applied to exclude the condominium unit from being a “residential complex,” reasoning that:

• hotels, motels, inns, boarding houses and lodging houses are premises that are regularly supplied as accommodations to third parties on a short‑term basis for a fee
• short‑term accommodations provided in a hotel, motel, inn, boarding house and lodging house are normally furnished accommodations, and
• rooms and suites in a hotel, motel or inn are supplied with heat, electricity and, in many instances, air conditioning

The TCC also held that all or substantially all of the leases or licenses to use the premises were for periods of less than 60 days. In reaching this conclusion, the court reasoned that the “substantially all” test is not calculated based on the time period in which the taxpayer owned the property (i.e. 10 years) but, rather, at the time the condominium was sold.

Federal Court of Appeal’s decision

The taxpayer appealed to the FCA. The FCA dismissed the taxpayer’s appeal, on the basis that the TCC had not made a reviewable error in its finding that:

• the property was not a “residential complex,” due to its similarity to a hotel, motel, inn, boarding house or lodging house, and
• all or substantially all of the leases were for periods of less than 60 days

The FCA held that the property’s sale was not an exempt supply, and therefore GST/HST was payable, because the Hotel Exclusion applied to exclude the condominium unit from being a “residential complex.” The taxpayer has 60 days to apply for leave to appeal this decision to the Supreme Court of Canada.

The takeaway

The Hotel Exclusion can result in residential real property (which would otherwise be an exempt supply) being subject to GST/HST. Because the purchaser of a residential property may not be entitled to recover the GST/HST that they pay, the application of the Hotel Exclusion may result in the value of the property being reduced by the amount of GST/HST payable on the sale (i.e. the GST/HST included price for a taxable property should generally equal the tax‑exempt price). Owners of real property are strongly advised to consider the GST/HST implications that arise when using their property as a short‑term rental. Persons acquiring residential property should also consider whether they are responsible for paying GST/HST on the acquisition and whether they can shield themselves from a GST/HST liability when a vendor certifies, in accordance with section 194 of the ETA, that the sale is exempt.

Although the Hotel Exclusion does not generally apply to properties that are owned by an individual, it could apply if the property is not used primarily as a place of residence of the individual, an individual related to the individual or a former spouse or common‑law partner of the individual. Accordingly, even if the owner of a condominium was an individual (and not a corporation), the sale of the condominium that has been used solely as a short-term rental would still be subject to GST/HST. There are also deeming rules in section 190 of the ETA that can trigger a deemed sale of residential properties in situations when a person begins to hold real property as a residential complex for rental purposes.

PwC can help you understand the GST/HST pitfalls associated with owning and purchasing residential properties for use in short‑term rentals and navigate the Hotel Exclusion rules, which can trigger unexpected GST/HST implications.