TaxMatters@EY – June 2024

Krista Fox and Alan Roth, Toronto

Concern over Canada’s housing supply shortage and home affordability continues to make the headlines and has recently been at the forefront of government policy considerations. In an effort to address these issues, the federal government and certain provincial governments are implementing measures that include discouraging residential home flipping, speculation and short-term housing rentals.

Let’s take a look at recent developments related to federal proposals to deny expense deductions for noncompliant short-term rental properties and the recent enactment of the British Columbia home-flipping tax.

Noncompliant short-term rentals

In its 2023 fall economic statement, the federal government announced its intention to introduce a measure to deny the deduction of rental expenses incurred on noncompliant short-term rentals. Draft legislation was released at the end of 2023 and subsequently included in Bill C-69, the first 2024 budget bill, on May 2, 2024.¹

Determination of noncompliance

Under proposed legislation, residential property owners will be unable to deduct rental expenses incurred on or after January 1, 2024 to earn short-term rental income on a Canadian residential property that is offered for rent for less than 90 consecutive days if either:²

• The property is located in a province or municipality that has prohibited short-term rentals, or
• The property owners fail to comply with all applicable provincial or municipal licensing, permitting or registration requirements for operating a short-term rental.³

Residential property includes all or part of a house, condominium unit, apartment, mobile home, cottage, trailer, houseboat or other property in Canada that is permitted to be used for residential purposes under applicable law. A property owner may include an individual, corporation, trust or partnership.

To allow for a transitional grace period, a property owner who complies with all applicable provincial and municipal licensing, permitting and registration requirements on December 31, 2024 will be deemed to have complied for the entire 2024 taxation year.⁴

In other words, if a property is currently a noncompliant short-term rental because it does not comply with all applicable registration, licensing and permitting requirements, the owner has until the end of December to meet these requirements.⁵ In such a case, the owner’s short-term rental property will be considered compliant so that any expenses incurred to earn rental income from the property will be deductible for the entire 2024 taxation year.

Calculation of the amount of nondeductible rental expenses

The amount of nondeductible rental expenses for a noncompliant short-term rental is calculated as the total amount of outlays made or expenses incurred in relation to the use of the residential property as a short-term rental in the taxation year, multiplied by the number of days of noncompliance in the taxation year, divided by the number of days in the taxation year the residential property was a short-term rental.⁶

Administration

Proposed legislation also includes a provision allowing the CRA to assess or reassess any tax, interest and penalties resulting from noncompliance for any taxation year at any time.⁹ Therefore, the normal statute of limitations for assessments or reassessments will not apply.¹⁰

BC home-flipping tax

British Columbia recently enacted the Residential Property (Short-Term Holding) Profit Tax Act (the Act), which imposes a new tax at a rate of up to 20% on the “net taxable income” received from the disposition of residential property located in British Columbia.¹¹ This tax, commonly referred to as the BC home-flipping tax, will take effect after 2024.

The BC home-flipping tax, which was announced in the province’s 2024 budget, is entirely separate from the federal property-flipping rules and is not harmonized or administered with the federal or British Columbia income taxes.¹²

Liability for BC home-flipping tax

The BC home-flipping tax applies to an individual, corporation, trust or partnership (the seller) that disposes of a residential property located in British Columbia on or after January 1, 2025 that the seller owned for less than 730 days after its acquisition, provided an exemption does not apply.¹³ Properties purchased prior to January 1, 2025 are also subject to the tax if the property is sold on or after January 1, 2025 and was owned by the seller for less than 730 days. This tax may apply whether or not the seller is a resident of British Columbia.

Residential property for purposes of this tax includes a housing unit located in the province, including any subjacent or immediately contiguous land, and land located in the province that is zoned all or in part for residential use. Taxable properties may also include the right to acquire a residential property (e.g., a pre-sale contract to purchase a property under development).¹⁴

Calculation of BC home-flipping tax

The tax is calculated at a rate of 20% of the seller’s “net taxable income” from a taxable disposition of property occurring within 365 days after the property was acquired. For dispositions occurring after 365 days and within 730 days after acquisition, the tax rate is reduced proportionate to the length of time the property was held.¹⁵ No tax is payable on dispositions that occur when the property has been held for at least 730 days. 

For the purposes of this tax, net taxable income is calculated by subtracting the taxpayer’s cost of acquisition and cost of eligible property improvements of an enduring nature from the proceeds of disposition.¹⁶

A seller who is an individual or a trust may also be able to claim a primary residence deduction of up to $20,000 in computing their net taxable income, provided the seller owned the property for at least 365 consecutive days before the disposition and the property includes a housing unit that they or, in the case of a trust, a trust beneficiary lived in as their primary residence during the period of ownership. 

Exemptions

The home-flipping tax is subject to a number of exemptions, including:

• Certain life events, such as the breakdown of marriage or common law partnership, a serious injury or disability, death of the taxpayer or person related to the taxpayer, job relocation, foreclosure, or bankruptcy and insolvency
• Properties acquired as a consequence of death
• Related-party transactions
• Builders and developers selling properties in the ordinary course of business
• Delays of more than 365 days in the construction or placement of a housing unit
• Substantial renovation of a housing unit or the demolition of a housing unit and the construction of another one on the property during the period the taxpayer owned the taxable property
• Exempt entities, such as registered charities and nonprofit organizations, government and local public bodies, Indigenous nations, certain housing corporations and corporations owned by municipalities or regional districts
• Certain property locations, such as property located on a reserve¹⁷ and Treaty lands of a Treaty First Nation.

Administration

A seller who makes a taxable disposition of residential property is required to file a tax return within 90 days of the disposition, subject to certain exceptions.¹⁸ A separate return has to be filed in respect of each taxable transaction. The home-flipping tax is due on or before the taxpayer’s due date for filing the tax return.

Penalties may be imposed for failure to file a return, repeated failure to file a return, failure to provide required information, failure to comply with requirements to produce information or records, interfering with an audit, and gross negligence.

The civil penalty on third parties that make false statements or omissions in respect of another person may also be imposed under this Act.¹⁹

Conclusion

Homeowners, prospective home buyers and investors must continue to be mindful of the evolving tax rules in relation to housing. Failing to comply with federal, provincial and municipal laws could result in an unwelcome tax bill.

For further information on other recent federal measures aimed at tackling housing affordability, see “Focus on Housing“ in the February 2023 edition of TaxMatters@EY: Family Wealth Edition.

Talk to your EY advisor for more information on how these measures may apply to your situation.  

Lucie Champagne, Toronto

In the days leading up to the tabling of the federal budget on April 16, 2024, the government was busy pre-announcing certain measures for individuals and businesses that would be included in the budget. One of the measures announced was in respect of the home buyers’ plan (HBP).

If you’re a first-time home buyer, the HBP allows you to withdraw funds — up to a withdrawal limit — from a registered retirement savings plan (RRSP) to finance the purchase of a home. Prior to the 2024 pre-budget announcement, the HBP withdrawal limit was $35,000.

You're considered a first-time home buyer if neither you nor your spouse or partner owned a home and lived in it as your principal residence in any of the five calendar years beginning before the time of withdrawal. If you're buying a new home that's more suitable or accessible for a disabled individual, you can take advantage of the HBP without having to meet the above prerequisites.

As confirmed in the 2024 federal budget, the HBP limit is increased by $25,000, allowing eligible home buyers to withdraw up to $60,000 from their RRSP. This measure applies to the 2024 and subsequent calendar years in respect of withdrawals made after April 16, 2024.¹

In addition, individuals who make (or made) an HBP withdrawal from their RRSP between January 1, 2022 and December 31, 2025 will be granted an additional three years, for a total of five years, before they need to begin making repayments to their RRSP.

To learn more about the HBP, see Chapter 9, "Families,” in the latest edition of Managing Your Personal Taxes: a Canadian Perspective. 

Minhoo Kim, Calgary, and Jeanne Posey, Vancouver

In 1351231 Ontario Inc. v The King, the Tax Court of Canada determined that when a condominium that was being rented through short-term leases on an online rental platform was sold, the sale was subject to GST/HST. The Court focused on the definition of exempt supply under Schedule V of the Excise Tax Act (the Act) and the application of the change-in-use rule under subsection 206(2) of the Act.

Background and facts

On February 29, 2008, the taxpayer purchased a used condominium in Ottawa as an investment property. During its first nine years of ownership, the taxpayer rented the condominium to a number of tenants who signed long-term leases, each exceeding 60 days. However, between February 25, 2017, and April 2018, the condominium was listed and rented through an online rental platform as a short-term rental with a number of leases being signed, all less than 60 days.

The taxpayer realized gross revenue of $11,200 and $43,179 in 2017 and 2018, respectively, from the short-term leases.

In December 2017, the taxpayer listed the condominium for sale and in January 2018, the condominium was sold to an arm’s-length purchaser. The sale closed in April 2018. On completion of the sale, neither the taxpayer nor the purchaser remitted GST in respect of the sale.

When assessing the taxpayer for its annual GST reporting period between June 1, 2017 and May 31, 2018, the Minister of National Revenue assessed the taxpayer for $77,080 as GST/HST collectible on the condominium sale. 

Issue

The issue before the Court was whether the condominium sale was subject to GST on the basis that it was not considered a residential complex as it was similar to a motel, hotel, inn, boarding house, lodging house or “similar premises,” all of which are excluded from the definition of residential complex and therefore subject to GST on a sale.

Court analysis and decision

In general, GST/HST is payable at a rate of 5% by a recipient of a taxable supply that is made in Canada. If the supply is made in a participating province, the tax rate is increased to match the province’s tax rate unless it meets the exemption criteria under the Act. In this case, since the condominium was located in Ontario, the sale of the condominium would be subject to 13% HST, unless it met the exemption criteria. 

In the judgment, the Court analyzed whether the condominium was a taxable supply under subsection 123(1) of the Act and, if so, if it was an exempt supply under section 2 of Part I of Schedule V of the Act.

The condominium was a taxable supply

Subsection 123(1) of the Act defines a “taxable supply” to be “a supply that is made in the course of a commercial activity”, which means that most property and services, including everything from new appliances or a new home to restaurant meals, haircuts and even lawyers’ bills, will be a taxable supply. 

“Commercial activity” is also defined in subsection 123(1) of the Act and includes in paragraph (c) of the definition “the making of a supply (other than an exempt supply) by the person of real property of the person, including anything done by the person in the course of or in connection with the making of the supply.”

Therefore, the sale of real property is a commercial activity unless it is specifically exempt under the Act.

The condominium was not an exempt supply

Schedule V of the Act outlines exempt supplies for GST purposes, including certain supplies of real property. The relevant provision in this case would treat the sale of the condominium as being an exempt supply if three conditions were satisfied:

• The condominium sale was the sale of a “residential complex”
• The taxpayer was not a builder of the condominium
• The taxpayer did not claim input tax credits when acquiring or improving the condominium

The second condition was met because the taxpayer bought the condominium as a used residential property.

The third condition was also met since the taxpayer did not pay GST when the condominium was purchased, nor did the taxpayer claim input tax credits for the improvements made to the condominium.

Therefore, the case came down to whether the condominium was a “residential complex” as defined in subsection 123(1) of the Act. In particular, the Court focused most of its analysis on whether the exclusion in the definition applied to the condominium. Specifically, the definition of a residential complex excludes “a building, or that part of a building, that is a hotel, a motel, an inn, a boarding house, a lodging house or other similar premises… and all or substantially all of the leases… 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 60 days.”

The Court concluded that at the time it was sold, the condominium was being leased in a manner that was similar to a hotel, motel, inn, boarding house or lodging house since the unit was supplied as accommodations to third parties on a short-term basis for a fee. The Court cited in support of its conclusion the fact that the short-term leases included heating, air conditioning, electricity, Wi-Fi access and furniture.

The Court then considered the “all or substantially all” test set out in the exclusion. Specifically, it considered whether at the point in time the taxpayer sold the condominium “all or substantially all” of the leases under which the condominium was supplied were for periods of continuous possession of 60 days or more.

The Court held that the condominium did not meet the definition of residential complex because at the time it was sold the condominium was like a hotel or motel, and all the short-term leases were for less than 60 days. The Court concluded that the definition of residential complex contains no time stamp because the determination of whether the “all or substantially all” test applies is not made over a period of time. Rather, the determination is made based on the use of the condominium at the time the condominium was sold.

In addition, the taxpayer was not an individual and, as such, the condominium could not qualify as a residential complex under paragraph (c) of the definition of that term in subsection 123(1) of the Act. 

In coming to this determination, the Court also explored the change-in-use rule under subsection 206(2) of the Act. The change-in-use rule applies when a taxpayer acquires real property for use as capital property without using it in commercial activities but later begins to use the capital property in commercial activities. If applicable, the taxpayer would be deemed to have repurchased the property at the time of the change in use and to have paid GST at that time equal to the tax it paid on the acquisition of the property that was not previously recovered by way of rebate, refund or remission. The Court determined that, under paragraph 141.1(3)(a) of the Act, the taxpayer was deemed to have started commercial activities when the condominium was first offered on the online rental platform.

Section 197 of the Act stipulates that the change in use must be at least 10% of the total use of the property for the rule to apply. The relevant period for determining whether a change in use of at least 10% has occurred begins on the later of the day the taxpayer last acquired the real property and the day the change-in-use rule last applied to the property, and ends at any later time.

In response to the taxpayer’s argument that the condominium met the exception to the change-in-use rule under section 197 of the Act, the Court clarified that the actual usage or proportion over the period of ownership is immaterial in determining the applicability of the change-in-use rule. Rather, what matters is the cumulative change in use of the property beginning at the point of time when the real property was last acquired. The taxpayer changed the use of the condominium on February 25, 2017, and at that point more than 10% of the condominium was used for commercial activities. As such, the exception was not met, so the condominium was subject to the change-in-use rule.  

Decision

The Court dismissed the taxpayer’s appeal and found that the condominium sale was a taxable supply, so it was subject to GST/HST. In doing so, the Court confirmed that the change-in-use rule is a point-in-time test that determines the extent of the change in use at that specific time.

Lessons learned

The decision is a reminder to sellers of real property to be aware of the potential application of GST/HST to a future sale. If you’re a rental property owner and contemplating offering your property for short-term rental, you should take into consideration the Court's interpretation of "all or substantially all" as applying at the time of sale rather than over the entire duration of ownership.

Furthermore, this case highlights the importance of the change-in-use rules and reminds us that the Act applies these rules to the specific point in time a change in use occurs, and it is then that a supply may be deemed to have occurred.

Finally, as the rules around real estate continue to evolve, it’s more important than ever to do your research or seek professional advice when considering the purchase of residential property, particularly for investment as a rental property.  

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