With Taylor Swift taking over Toronto, homeowners who rent out their home on a short-term basis could find themselves saying, “Look What You Made Me Do”. Here’s how renting to Swifties might turn your extra income into a surprise tax bill you didn’t plan for.

As a starting point, let’s assume that a residential property is used for the owner and their family’s own personal use, prior to Taylor Swift rolling into town. Outside of the GTA, a similar outcome could occur for the family cottage that becomes a short-term rental in the summer.

Entering into a Short-Term Lease – Change-in-Use Rules

Upon entering into a short-term lease, you should consider whether the change-in-use rules under section 206 of the Excise Tax Act (the “Act”) should apply.

General Application:

Generally, short-term rentals for periods of less than one month should be considered commercial activity, whereas a long-term rental of one month or more should not be.

If commercial activities increase by 10% or more, it triggers supplies and tax implications. GST/HST on the deemed supply is calculated on the “basic tax content” of the property, which essentially amounts to GST/HST paid on the acquisition or improvements made to the property.

The application of the change-in-use rules can also have implications on GST/HST recovery, as registrants can claim an input tax credit (“ITCs”) for GST/HST paid on capital real property used in commercial activities.

Beginning or Increasing Use in Commercial Activities:

When starting or significantly increasing commercial use of a property (by 10% or more), the property is treated as if it has been sold. The owner is considered to have paid tax on this notional sale, based on the property’s “basic tax content” (essentially the GST/HST paid on its purchase or improvements). This may enable the owner to claim input tax credits (ITCs) for the portion of the property now used for commercial purposes.

Ceasing or Reducing Use in Commercial Activities:

When ending or decreasing commercial use by 10% or more in relation to capital real property, the registrant is deemed to have sold and reacquired the property and to have collected and paid GST/HST. The registrant is deemed to have paid tax on the deemed acquisition to the extent of its basic tax content, which may result in a GST/HST liability on the portion leaving commercial activity.

Insignificant Changes-in-Use

Section 197 of the Act states insignificant changes in use of less than 10% do not result in a change-in-use. Generally, courts have determined this calculation should apply at a point in time, rather than considering the use of the property over the entire ownership period.

Sale of Real Property

Often referred to as the “used residential property exemption”, the exemption in Schedule V, Part I, section 2 of the Act has many exceptions where the sale of a previously occupied residential property may not be exempt from GST/HST. Here is a summary of the main hurdles that a vendor of real property would need to overcome in order for the sale of their residential property to be exempt from GST/HST.

  • Vendor cannot be considered the “builder” for GST/HST purposes. Builder is a defined term and can apply more broadly that the colloquial definition, including to situations where the property has been substantially renovated.
  • Vendor cannot have claimed an ITC with respect to the acquisition or improvements made to the property.
  • The property must be considered a “residential complex”. Residential complex is also a defined term and generally requires the common amenities necessary for an individual to reside in.

Regarding short-term rental properties, it is important to note that the definition of residential complex can exclude certain properties where leases are for short-term periods of less than 60 days. In the recent decision of 1351231 Ontario Inc. v. The King (2024 TCC 37), the court determined that GST/HST applied to the sale of a residential condo where it was leased on Airbnb for the year immediately prior to sale.

Ceasing Use for Short-term Leases – Self-Supply Rules

The self-supply rules under section 190 of the Act deal with situations where a property becomes a residential complex. As noted previously, a residential property leased on a short-term basis for periods of less than 60 days may not be considered a residential complex. Where a property becomes a residential complex, the self-supply rules should deem a supply to have occurred at the fair market value at that time and may require the owner to remit GST/HST calculated on this value. For example, a self-supply may occur when:

  • An individual moves back into a property after it was previously leased for short-term periods, or
  • An individual who signs a one year lease with a tenant after it was previously leased for short-term periods.

At the same time, these examples may be considered a change-in-use (discussed earlier) which could have similar tax implications. It is important to note that because section 195.1 of the Act may deem the property not to be capital property from the time of the conversion until after the deemed builder either receives a taxable supply or receives an exempt supply of the complex, the change-in-use provisions that normally apply upon ceasing use in commercial activities may not apply to these situations.

Closing Comments

Although it is outside the scope of this discussion regarding GST/HST, it is worth noting that a similar set of rules may apply for income tax when converting residential properties from personal use to income producing, or vise-versa.

The application of GST/HST to real property can vary depending on the specific facts of each scenario. Whether you are opening your home to Swifties or considering changing the use of a residential property for another reason, it is important to seek appropriate and timely professional advice. For assistance with GST/HST, contact us and ask to speak to an expert on our HST team.