Short-term rentals like Airbnb are becoming increasingly popular. We receive numerous inquiries about them at my real estate law office in Edmonton, Alberta, and I know that individuals are concerned about them across Canada. The legal issues surrounding short-term rentals often involve local zoning regulations for a property, which can differ by city and even by neighborhood. The tax implications of Airbnb (or its competitors like Vrbo, HomeAway, TurnKey, FlipKey, etc.), however, are predominantly provincial and national. This blog post will highlight some of the key considerations and provide links to further reading from accountants who specialize in real estate investment.
What kind of income are you generating and how will it be taxed? Does having a mix of short-term and long-term rentals make a difference? What if you have acquired the property through an Agreement for Sale and plan to rent it out on a Rent-to-Own basis to someone who will be doing short-term rentals? There are certainly a lot of questions. Make sure you start pondering them—especially if you’re planning to attend our upcoming AFS (Agreement for Sale) Intensive workshop scheduled for September 14, 2019 in lovely Red Deer, Alberta.
Airbnb Tax Classification and Reporting
The initial tax considerations with short-term rentals like Airbnb revolve around how much income you’re earning and the method of earning it. For individuals looking to occasionally rent out a spare room for extra income, the process can be relatively straightforward. Regardless, you will need to report the gross income and expenses on your tax return. If your earnings from short-term rentals are less than $30,000 Canadian per year, you are not required to charge sales tax (GST/HST). If you are only offering a furnished space to guests, the income is reported as rental income on your tax return.
However, tax matters are not always as clear-cut as they appear. If you provide additional services to guests like breakfast, laundry, guided tours, etc., the income could be categorized as a business, leading to different reporting and tax obligations. Moreover, if short-term rentals constitute the majority of your property usage, it may no longer qualify as a residential complex for tax purposes. Some provinces or cities may also levy additional accommodation taxes or charges on short-term rentals. As always, ensure that you conduct thorough research.
Tax Deductions and Property Status
When claiming expenses to reduce the tax liability, short-term rental hosts must differentiate between two types of deductions. The first type is current expenses, which include regular costs such as mortgage, utilities, insurance, and repairs. These expenses can be prorated based on the duration of property rental and the portion of space rented out (e.g., one room vs. an entire house).
The second category is capital expenses, which involve more lasting investments like renovations and building improvements. There is a limited allowance for capital expenses in a given year, but the costs can be deducted over multiple years.
N.B. Claiming capital expenses can impact the tax status of your property!
When selling a property that serves as your primary residence or a long-term rental, it is usually exempt from GST/HST. Conversely, property mostly used for short-term rentals is subject to GST/HST upon sale. Furthermore, if you claim capital expenses on your residence or rental property to offset income from short-term rentals, it may prevent you from claiming the principal residence GST/HST exemption when selling. The Canada Revenue Agency does not permit changing the status back to a principal residence or long-term rental before selling; doing so would make you liable for GST/HST based on the market value!
Delve Deeper into Tax Implications for Short-Term Rentals
This blog post has highlighted some essential tax considerations for Airbnb and other short-term rentals in Canada. Tax laws are intricate, and it’s crucial to conduct thorough research if you intend to become a host or if your Rent-to-Own tenant/buyer intends to host. We are pleased to refer everyone to our associates at BDO Canada who have authored a detailed article and a useful FAQ on this subject.
Tax Considerations for Airbnb Hosts
Short-term Rentals: Top GST/HST Questions Answered
One final piece of advice: maintain detailed records of all your income and expenses related to short-term rentals, along with guest numbers, length of stays, services provided, etc. In case of a tax audit, you’ll want to be prepared to address all inquiries! It may be wise to consult with an accountant early on to avoid complications down the line.
“Airbnb Apartment Rental Logo Holiday Screen” image by TeroVesalainen used under a Pixabay License.