It should be translated as “The house is small”, not “It is the toilet”.
I don’t recall seeing this sentence in the course although it just came up in the sentence search for me from the Gàidhlig course dashboard (this is after the May 23 update, which seems to have changed how the sentence search works–it now brings up sentences on Tatoaba that aren’t in the Clozemaster course).
The sentence I see when I’ve reviewed the course sentences is Tha an taigh-beag beag which is correctly translated as “The toilet is small.” There seems to be a technical issue here where the two sentences are getting mixed up with each other.
Tha an taigh-beag beag can be found on Tatoeba, but Tha an taigh beag either isn’t on Tatoeba or it’s been removed or hidden.