More and more Canadians are jumping into the short-term rental market where they rent out their homes, condos or cottages through sites, like Airbnb as a means for earning some extra income.
Earning extra income is always great, and that income has to be reported to the Canada Revenue Agency (CRA).
When you earn income through Airbnb, you are not only going to want to declare that income but you are also going to want to learn which deductions are eligible for you to claim, and then claim those deductions to reduce the amount of tax you have to pay.
What is Income?
Income earned from renting your home, condo or cottage is gross rental income, which needs to be reported on your Canadian personal income tax return (T1). You are also entitled to claim expenses related to the income on your return as tax deductions against the income earned.
For income tax purposes, a distinction is made between income from property and income from business, and it is not always easy to determine which classification applies to your rental income. According to the Canada Revenue Agency (CRA), the determination comes down to the number and kinds of services that you provide for your renters.
Usually, you will be considered to have earned rental income when you rent space and provide basic services such as heat, light, parking, and laundry facilities. In this case, the income that you earn will be considered rental income and must be reported on form T776 (Statement of Real Estate Rentals), or make sure that when you are using TurboTax, that you answer the questions related to renting your real estate, and let the software take care of the eligible deductions and do all the number crunching behind the scene.
If, on the other hand, you operate more as a bed and breakfast and provide additional services to your guests — such as cleaning, security, and meals — you will more likely be considered to be carrying on a business, and any income earned will have to be reported as business income on your personal tax return, which means completing the T2125, Statement of Business or Professional Income, but again, TurboTax takes care of all of that for you when using the software. The more services you provide as a host, the greater the chance that your rental operation will be considered a business, which is perfectly fine, because it means more deductions that you can claim to offset that self-employed income.
Do I Need to Charge GST/HST?
Your Airbnb rental income may be subject to GST/HST because short-term housing rentals for periods less than 30 continuous days are taxable for GST/HST purposes. Long-term residential rentals, on the flip-side, are exempt from GST/HST.
If short-term rental revenues (plus income from any other commercial activity you may have) exceed $30,000 in a 12-month period, you are required to register and collect GST/HST on this income.
If you are nearing that threshold, then you should also take the time to determine if a provincial sales tax or other local tax/levy applies on the short-term housing rentals.
How to Claim Airbnb Expenses
The income tax treatment of the expenses that you incur as an Airbnb host may vary depending on whether the expense is considered a current expense or a capital expense:
- Current expenses are ongoing-period expenses, such as electricity, or those that don’t provide a lasting benefit.
- Capital expenses generally give a lasting benefit or advantage.
Renovations or repairs made to your home to make it suitable to rent and which extend the useful life of your property or improve it beyond its original condition are usually capital expenses.
You may claim a prorated portion of many current expenses when you rent out your home through Airbnb and these expenses include:
- Mortgage interest
- Property taxes
- Maintenance (such as painting or housekeeping of rental space)
- Home insurance
If you earn rental income from a condominium unit, you can also deduct condominium fees that represent your share of the upkeep, repairs, maintenance, and other current expenses of the common property.
Keep in mind that you cannot deduct land transfer taxes, payments of mortgage principal, or the value of your own labour.
Calculating your current expenses
If you rent out your entire home, you need to calculate the number of weeks or days of the year that you hosted guests as a percentage of the total time in the year that you owned the home. You then must use that percentage to prorate your costs. For example, if you rented out your home during November and December, while you vacation in Florida, then you would be entitled to claim roughly 17% (61/365 or 2/12) of eligible expenses.
If you rent out only part of your home, you are entitled to claim the amount of your expenses that relate to the rented area of the property. For instance, using the example above, if you decided to rent out 1,500 square feet of your 3,000-square-foot house while you headed down south, you would be entitled to deduct 50% (1,500/3,000) of the expenses already prorated at 17%. Remember that you can also calculate the eligible expenses using square metres or the number of rooms you are renting in your home.
Can I Recover Any GST/HST?
If you are registered for the GST/HST, and report the rental income you have earned, you are eligible to recover the GST/HST paid on certain operating costs, such as:
- Referral fees to a website
- Maintenance and housekeeping expenses
Unlike the current expenses noted above, capital expenses cannot be deducted all at once and instead must be deducted over a period of several years as capital cost allowance (CCA). CCA, or depreciation, is eligible to be claimed depending on the type of rental property you own and the date you acquired it. In very simple terms, you can deduct a percentage of the property’s cost over a period of several years. Depending on the rental usage of the home, you may be entitled to a recovery on all or a portion of the GST/HST paid on capital expenses.
Caution: Renting and the Long-Term Tax Impact
Decisions made about a rental property can cause surprising results for decades into the future, such as;
- If you claim CCA on your home, you will not be able to claim the principal residence exemption on it when you sell it
- When you begin renting a personal property, more than incidentally or occasionally, you are considered to have changed the use of that property for income tax purposes, so as a result, there are significant income tax consequences that must be considered
- There are also significant GST/HST consequences which may arise if you rent out your home.
If your home is rented 90% of the time or more, for rental periods of less than 60 days, that property may lose its status as a “residential complex.” If that occurs, any subsequent sale of that property becomes subject to the GST/HST, which may come as a surprise to prospective buyers who were likely not expecting to pay GST/HST on the purchase.
If you decide at a later date to stop renting out the property, the property regains its status as a personal residence (or exempt long-term rental) but you will need to pay GST/HST to the CRA based on the fair market value of the home at the time that it changes back to a residential complex.
While renting out your home may seem like an easy way to generate extra income, the decision to become a host must be well informed and include a good understanding of the tax implications and must take into consideration the responsibility to keep proper records.
You will be required to maintain detailed records of all the rental income earned during the year as well as supporting documentation for all expenses which were incurred. Keeping a calendar of rentals is also helpful to support the number of days that the property was rented compared to the number of days that either you resided in it or that it was vacant. You can validate your purchases and operating expenses with supporting documents such as invoices, receipts, and contracts.
Canadian Tax Expert @ TurboTax. Former CRA employee.