Navigating Short-term Rental Income Taxes in Canada

April 6, 2023by admin0

In recent years, the sharing economy has made it easier than ever for Canadians to make extra money through online platforms. If you’re one of the many Canadians on the short-term rental bandwagon, it is a great way to generate extra income.

Short-term rental income is income earned from renting out a property for a short period of time. This can include renting out a room in your home, your entire home while you’re away, or a vacation property.

Offered through platforms like Airbnb, VRBO (Vacation Rentals By Owner) or Booking.com, short rentals have revolutionized the accommodation industry by providing a diverse array of lodging options for travelers. They contribute to the economy by promoting tourism and generating extra income for local businesses and property owners.

Renters benefit from a wide variety of affordable and unique accommodations that offer authentic experiences, while property owners can enjoy a flexible and potentially lucrative source of income.

But it’s important to understand the financial impact because of the complexities of taxing short-term rental income. In this blog post, we’ll explore the tax implications of short-term rental income in Canada, as failure to report it correctly can result in penalties and interest charges.

Tax Obligations for Short-term Rental Incomes

  1. A key distinction to make here is that in Canada, short-term rental income is considered business income and taxed the same way as long-term rental income.
    The amount of tax you’ll need to pay on your short-term rental income will depend on your overall income for the year. If you have other sources of income, such as a salary or wages from a job, your short-term rental income will be added to that income and taxed at your marginal tax rate.

2. If you’re renting out your primary residence, you may be able to claim the Principal Residence Exemption (PRE), which can reduce or eliminate the amount of tax you owe on your rental income. However, if you’re renting out a second property or a property that is not your primary residence, you will not be eligible for the PRE.
The Principal Residence Exemption (PRE) is a tax benefit in Canadian taxation that allows homeowners to avoid paying capital gains tax on the appreciation of their principal residence when they sell the property. A principal residence is defined as a property where the homeowner, their spouse, or their dependents ordinarily inhabit during the year.

  1. If you earn more than $30,000 from short-term rentals in a calendar year, you must register for, and collect GST/HSTon your rental income. This is because short-term rentals are considered to be commercial activities, and are subject to GST/HST in the same way. If you’re earning less than $30,000 per year, you’re not required to register for a GST/HST account, but you can choose to do so voluntarily. By registering, you’ll be able to claim input tax credits on your expenses, which can help reduce your GST/HST liability.

Expenses Related to Short-term Rentals

A benefit of earning income from short-term rentals is that you can deduct certain expenses related to the rental activity from your income. These expenses can help to reduce your overall tax liability. Some of the expenses you can deduct include:

  • Mortgage interest
  • Property taxes
  • Utilities
  • Maintenance and repairs
  • Cleaning fees
  • Advertising fees
  • Property management fees

You can only deduct expenses that are directly related to renting out your property. If you use your property for personal use as well, you’ll need to prorate your expenses to reflect the portion of the property that is used for rental purposes.

Tips for Reporting Short-term Rental Income

  1. Keep Accurate Records: Keeping accurate records of your rental income and expenses is essential. This includes keeping track of how many nights you rent out your property, the rental rates, and any expenses related to the rental activity.
  2. Report All Income: Make sure you report all of your short-term rental income on your tax return. This includes income earned from platforms like Airbnb, as well as income earned from other sources.
  3. Claim all Deductions: Claim all of the deductions you’re entitled to. This will help to reduce your overall tax liability.
  4. Consult with a Tax Professional: A tax professional can help ensure that you’re reporting your rental income correctly and can help you maximize your deductions.

Renting out your property on short-term rental platforms like Airbnb can be a great way to generate extra income, but you need to ensure that you’re meeting your tax obligations and minimizing your tax liability.

As a dedicated accounting and tax advisory company, we work tirelessly to equip our clients with the information and guidance necessary to confidently navigate Canada’s complex taxation system.

Proudly serving clients in Mississauga and the GTA for more than 20 years, Taxvisors offers an extensive array of accounting, tax, and bookkeeping services to address all your financial requirements. Our skilled team of professionals customizes solutions to cater to your individual needs, regardless of your background or the scale of your business.

To find out more, click here to connect with our experienced professionals.

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Copyright by The Beespoke. All rights reserved.

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