Tax Implication of Airbnb (Short-term Rental) Income

A lot of Canadians are renting out their principal home or secondary property—using Airbnb or another digital platform. Before doing so, one should consider the tax implications as the Income Tax Act (ITA) and the Canada Revenue Agency (CRA) have specific rules surrounding rental income.

Whenever you earn any income from renting, you must report the gross rental income and related expenses on your income tax return.

Business income vs rental income

For income tax purposes, there is a distinction between rental income (from the property) and business income (from the property), and in many cases, it is complicated to determine the right classification. As per the CRA, the determination boils down to the number and kinds of services you provide for your renters. To make it simple, if you provide basic services such as heat, light, parking, and laundry facilities, it is considered rental income. However, if you provide additional services to your guests—such as bed, breakfast, meals, cleaning, security, etc.—you are more likely to be classified to be carrying on a business.

The main difference is that rental income is not subject to CPP. From a borrowing perspective, most lenders prefer business income compared to rental income.

Owning a short-term rental (Airbnb) property inside a corporation

If you own a rental property inside a corporation, you may want to report rental income as “active business income” –depending upon the service you provide. If so, rental income will be subject to small business corporation tax @ 12.2% in Ontario (assuming a Canadian Controlled Private Corporation).

But for this, it is highly advisable that you maintain strong documentation to support you as to why your short-term rental income is a business (like a hotel operation) and not just a basic rental.

In case your rental income is classified as basic rental income then it will be subject to passive income tax @ 50% with 30% refundable if the corporation declares a taxable dividend to the shareholders. Beware, as per amended rules, passive income in excess of $50,000 inside a corporation, will also impact lower tax rates on the active business income.

An alternate strategy will be to pay yourself a salary to lower the amount of income left inside the corporation to lower the higher tax rate impact.

Eligible expenses:

To offset that extra income that you are reporting from your rental income, you can claim and deduct eligible expenses related to the rental income.  Just make sure to keep all receipts! A bank or credit card statement is not a receipt.

Current expense:

Some of the more common expenses incurred for renting an Airbnb that you can deduct include, but are not limited to:

• New bedding, toiletries, cutlery, plates, glasses, etc.
• An extra key and lockbox
• Laundry detergent
• Snacks, cable, and internet charges
• Cleaning services
• Property taxes
• Management fees
• Insurance
• Utilities (heat, hydro, electricity, water)
• Mortgage interest (but NOT principal payments)
• Maintenance costs
• Advertising cost
• Office expenses
• Professional fees (such as legal and lawyers)
• Travel
• Motor vehicle expenses (with certain conditions)

Capital expenses

Capital expenses, that provide lasting benefits over the year that extend the useful life of your property, can’t be deducted in one year and instead must be deducted over a period of several years as per capital cost allowance (CCA). The CCA claim depends on the type of property and the specific rules of the CRA.

Important to keep in mind is that only a portion of expenses is eligible for deduction – the portion of the expenses that are being used to earn the rental income. Further, that might need to be pro-rated for the number of days that the property is used to earn rental income.

GST/HST Considerations:

Do I have to register for the GST or HST?

Maybe……………………………….

Airbnb (short-term) rental income is subject to the GST/HST if the rentals are for less than 30 consecutive days (one month) and the rent charged is more than $20/day.  Long-term residential rentals are exempt from GST/HST.

As of July 1, 2021, new rules apply to platform-based short-term accommodation. The aim is to ensure all supplies of short-term accommodation are subject to GST/HST when supplied through a digital platform with the tax being collected by either the property owner or an accommodation platform operator. Generally, accommodation platform operators will only collect GST/HST when the property owner is not GST/HST registered

But there are some exemptions:

The “Small Supplier” rule states that you do not have to register for the GST/HST if your revenue remains under $30,000 in the last four calendar quarters or any single calendar quarter.

So if your revenue exceeds $30,000 from rental (plus income from any other commercial activity you may have), then you must register for the GST/HST. You may, however, want to consider registering for the GST/HST voluntarily, even before that.

Why you might want to register voluntarily (before reaching the $30,000 threshold) for GST/HST:

It allows you to claim back GST/HST paid

1. To get your property ready for rental income or
2. On expenses to generate rental income.

However, if you wait to reach the $30,000 small supplier threshold, you need to register GST/HST and start collecting, tracking, reporting, and remitting it to the CRA. You have 29 days from the first day you exceeded the threshold to register for the GST/HST. The only Input Tax Credits that you can claim are the ones that are incurred after you are registered for the GST/HST.

Buying a new property exclusively for short-term rental?

When purchasing a new or substantially renovated house that is subject to GST/HST exclusively for short-term rentals, it is normally a good idea to register for GST/HST voluntarily before exceeding $30,000 in income.

If you register for GST/HST before the closing date, you will recover the full GST/HST paid on the purchase of the property. In this case, you can either

1. Remit the GST/HST directly to the CRA with your return, instead of paying it to the seller. This way, if you are eligible for a full recovery of the GST/HST you would claim this on the same return, resulting in no net payment of GST/HST; or
2. Pay GST/HST to the seller and later file a GST/HST return requesting a refund from the CRA.

Caution: Renting and the long-term tax impact

The decision about the rental property can have many tax implications and many of them surprise you.

When you start renting a personal use property, other than incidentally or occasionally, it is considered a change of use, and you are deemed to have disposed of your property at the fair market value (FMV). A capital gain will be assessed on the difference between the FMV of the property and its adjusted cost base (ACB). Any gain calculated may be reduced or eliminated by designating the property as your principal residence. However, if you have more than one property, you may not designate it to be a personal residence.

On the other hand, you can make an election (a section 45(2) election) to defer the deemed disposition on a change in use to a later year. By making this election, you can also continue to designate the property as a principal residence for up to four years, or even longer in the appropriate circumstances. There are specific rules related to this election and care must be taken to elect and maintain it.

What if you later stop renting or decide to sell the property?

If you convert a personal use property to rental use and later at some point you decide to stop renting the property and change it back to personal use or start renting long-term rental (exempt supply), you are deemed to have disposed of the property (to yourself). You will need to self-assess the GST/HST on the fair market value of the property and remit it to the CRA. You’re eligible to claim, a refund of part of the GST/HST you paid on acquiring the property, GST/HST rebate. This situation is often referred to as a “self-supply”.

Similarly, in such a situation, subsequent sale of the property becomes subject to GST/HST. This may come as a surprise to prospective buyers, and most buyers may not be willing to pay HST on top of the market value of a similar property. And you might end up absorbing the HST yourself and remitting it to the CRA.

It is a complicated subject, and some tax implications might be disastrous and surprising. It is always better to obtain qualified professional advice. Source Accounting Team is ready to guide and help you navigate the difficult tax planning decision.

 

If you have any questions or any other tax and accounting issues, please feel free to reach out to Source Accounting Professional Corporation (CPA). Source Accounting is a full-service accounting firm in Mississauga, dedicated to individuals, small and medium-sized businesses, providing tax preparation, corporate tax filing, accounting, bookkeeping services, payroll solutions, etc. If you are looking for an accountant near me (Mississauga, Brampton, Toronto, GTA) or an accountancy firm, you are in the right place. Please call for consultation or send us an email. And if you find this post helpful, please let us know in your comments.

  

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.