Tax Rules for Airbnb & Short-Term Rentals in Canada

Short-term rentals through platforms like Airbnb, VRBO, and Booking.com have become a popular strategy for Canadians to generate additional income. However, these rental activities come with important income tax and GST/HST implications. As of January 1, 2024, new federal legislation has introduced even stricter rules, particularly regarding municipal compliance. This article outlines the key tax considerations, how GST/HST applies, what happens when you sell a rental property, and what investors must consider before offering short-term accommodations.

Income Tax Obligations

All income earned from short-term rentals must be reported on your personal tax return. Most hosts use Form T776 (Statement of Real Estate Rentals) to report this income, along with any related expenses. Eligible deductions may include mortgage interest, property taxes, utilities, repairs, insurance, cleaning, and management fees. However, it is critical that you maintain detailed records, including invoices and rental logs, to substantiate these expenses in the event of a CRA review.

If your rental activity resembles a business—such as offering hotel-like services including daily cleaning or meals—the CRA may classify your income as business income. In such cases, you must report using Form T2125 (Statement of Business Activities) and may also be required to pay Canada Pension Plan (CPP) contributions. This reclassification also impacts your ability to deduct certain expenses and claim depreciation (Capital Cost Allowance, or CCA).

CCA can be claimed on the building and its furnishings to reduce taxable rental income. However, caution is required. Claiming CCA reduces the property’s cost base, and any depreciation claimed may be added back as income (recapture) when the property is sold. Further, claiming CCA on a principal residence can void your eligibility for the Principal Residence Exemption (PRE).

GST/HST Considerations

If your gross rental income from short-term stays exceeds $30,000 in any four consecutive calendar quarters, you are required to register for a GST/HST number with the CRA. Once registered, you must charge GST/HST to your guests, file GST/HST returns, and remit the tax you collect. You are also eligible to claim input tax credits (ITCs) to recover GST/HST paid on related expenses such as renovations, supplies, and professional fees.

If your revenue remains below the $30,000 threshold, you are not required to register, and in that case, platforms like Airbnb will typically collect and remit GST/HST on your behalf under CRA’s simplified rules. However, you will not be able to recover GST/HST paid on expenses through ITCs.

Hosts who register must collect and remit the tax themselves. Airbnb will not do so in these cases. To support your filings, Airbnb and other platforms provide downloadable transaction reports that show gross income, fees, and taxes collected. These reports are essential for reconciling your income and ensuring tax compliance.

New 2024 Rule: No Deductions for Non-Compliant Rentals

Effective January 1, 2024, new rules under Section 67.7 of the Income Tax Act disallow expense deductions for short-term rentals that are non-compliant with provincial or municipal laws. Specifically, if your property is used as a short-term rental without the proper licenses, registrations, or permits – or if such use is outright prohibited – you may not deduct related expenses on your tax return. These disallowed expenses can include mortgage interest, utilities, property taxes, and repairs.

If your rental is only non-compliant for part of the year, your expense deductions will be prorated based on the number of compliant days. For example, if your short-term rental expenses for the year total $60,000 and the property was non-compliant for 181 out of 365 days, then $29,753 of those expenses would be denied, leaving only $30,247 deductible.

There is transitional relief for 2024. If your property becomes fully compliant by December 31, 2024, the CRA will consider it compliant for the entire 2024 tax year, allowing you to deduct all eligible expenses.

Definition of a Short-Term Rental

According to the CRA, a short-term rental is defined as the rental of residential property for a period of less than 30 consecutive days. These rentals typically include nightly or weekly stays facilitated through platforms like Airbnb, VRBO, and Booking.com. If the rental period is 30 days or more, the activity is generally treated as a long-term residential rental. Such rental is typically exempt from GST/HST and not subject to the same compliance requirements.

HST on Sale of Short-Term Rental Property

A common surprise for investors occurs when it comes time to sell a property that was used primarily for short-term rental purposes. Under GST/HST rules, the sale of residential property is normally exempt from tax. However, if the property was not used as your principal residence and was used on a regular and commercial basis for short-term rentals, then the CRA may consider the sale to be taxable.

This means you are required to charge GST/HST on the sale price of the property. In practice, residential buyers are rarely willing to pay HST on top of the purchase price, particularly in residential transactions. As a result, sellers often “absorb” the HST, which reduces their net sale proceeds. For example, on a $1,000,000 sale, the HST could amount to $115,000. This means that the seller walks away with only $885,000 unless this tax is added separately to the purchase price and paid by the buyer.

Investors should consider this tax impact before entering the short-term rental market. It’s especially important if they plan to resell the property in the near future. Failing to plan for HST on resale can wipe out profit margins and result in unexpected liabilities.

Short-Term Rentals in Your Principal Residence – Risks and Examples

While renting out a property full-time as a short-term rental has clear tax obligations, many homeowners choose to rent out part or all of their principal residence (PR) occasionally, for added income. However, this comes with important income tax and GST/HST risks, especially if the activity becomes habitual or commercial in nature. Below are two examples that illustrate common real-world situations.

Example 1:

Tommy owns a two-bedroom condominium, which he lives in full-time and designates as his principal residence. To generate some additional income, he rents out one of the bedrooms on Airbnb throughout the year while continuing to live in the other room.

In this scenario, Tommy is still occupying the unit as his principal residence. So, his eligibility for the principal residence exemption (PRE) is generally not impacted. However, he must report the rental income on his T1 return, using Form T776. Expenses such as utilities, property taxes, and maintenance must be reasonably prorated between personal and rental use. As long as Tommy does not claim Capital Cost Allowance (CCA), the CRA will usually not deny the PRE on the portion of the property he rents out.

From a GST/HST perspective, CRA typically does not require hosts to charge tax in cases of incidental or part-time short-term rentals within an owner-occupied home, unless the host exceeds the $30,000 threshold or provides extensive hotel-like services. That said, Tommy should keep detailed records and periodically review his revenue levels to ensure he remains below the threshold for mandatory registration.

Example 2:

Ekta owns a detached home, which is her principal residence. Each summer, she travels overseas for two months and lists her entire home on Airbnb as a short-term rental while she is away. She returns to live in the home for the rest of the year.

This situation carries more tax exposure. Since Ekta rents out the entire home on a recurring basis and is not personally occupying it during the rental period, the CRA may consider that there has been a change in use under Section 45(1) of the Income Tax Act. If so, she may be deemed to have disposed of the property at its fair market value at the start of the rental period, and reacquired it at the same value, potentially triggering a capital gain. To avoid this, she must not claim CCA and may elect under Section 45(2) to defer the deemed disposition.

Additionally, if the CRA views her short-term rental pattern as sufficiently commercial, it could lead to partial denial of the PRE upon sale. This would reduce her tax-free gain on the eventual sale of the home. She must also report the rental income for the two months she is away. For this, she will again need to use Form T776 with prorated expense deductions.

There is also a potential GST/HST implication on the sale of the property. If the property is viewed as being used primarily in a commercial rental activity, the CRA could require GST/HST to be charged on the sale, even if the property appears residential. As most residential buyers are unwilling to pay HST, Ekta may need to absorb the tax, reducing her net proceeds.

Final Thoughts

Short-term rentals offer flexibility and potential income, but the tax implications are far more complex than many hosts realize. Municipal and federal tax rules now intersect more than ever, and non-compliance can be costly. Before you get started, talk to a tax advisor who knows about real estate and cross-border taxes (if applicable). Also, remember to include any possible HST on resale when figuring out your return on investment.

So, what are you waiting for? For assistance with tax filings, GST/HST registration, CRA audits, or evaluating short-term rental viability, contact Madan CPA today.

Book a consultation: https://madanca.com/contact-us
Email: amadan@madanca.com
Phone: 905-268-0150