Has your cottage become “boring” to the grandchildren? – Do you have a spare room that’s going to waste? – Do you take frequent or long vacations which result in your residence being left empty for periods of time?
If you’ve answered yes to any of those questions, you’ve likely considered renting out part (or all) of your property and with sites like Airbnb, your home or vacation property can be booked whenever it’s convenient for you.
Like other, more traditional, rentals, the Canada Revenue Agency (CRA) has specific rules surrounding the declaring of rental income, which you should become familiar with as soon as possible.
Here’s what you need to know about earning income from Airbnb:
- By the Night or the Month – A Rental is a Rental
In the eyes of the CRA, any income earned by renting out your home or other property is considered to be rental income – even if it’s just for a night or two, every once in a while. Like other types of income, the money you make from your rental must be reported to the government as income on your personal income tax return. Before you have any second thoughts, keep in the mind the good news, that since you’re reporting the income, you are also able to deduct expenses related to that income.
- From Pillows to Property Taxes
To offset that extra income which you are reporting from your Airbnb venture, you can claim and deduct eligible expenses related to the rental. Just make sure to keep all of your receipts! Some of the more common expenses that you can deduct include, but are not limited to; New bedding – Toiletries- Cutlery – Plates, drinking glasses, wine glasses – An extra key and lock box- Locks for personal items – Laundry detergent & Snacks.
Other eligible expenses related to the earning of rental income which can be claimed, includes; Property taxes –Insurance – Utilities (heat, hydro, electricity, water) – Municipal annual licensing fees where applicable (Toronto and Vancouver have recently introduced these) – Mortgage interest (but NOT principal payments) – Cable and internet (if provided to your guests during their stay) – Maintenance costs & Cleaning services.
Keep in mind that only a portion of these expenses are eligible for claiming as eligible deduction, and the portion relates to the amount of your property that is being used to earn the rental income and the length of time, for example, the number of days per year, that it is available and being used to earn that income.
How Much is Eligible to Deduct?
Another way of looking at it is like this; if you rent your cottage on weekends only, and rent it out every weekend in a year, then you are renting out for 104 days out of 365 days (2 weekends x 52 weeks/year = 104). That means you would need to take your entire list of expenses related to earning the rental income, and multiplying that by the percentage of time that the cottage is rented out. That is calculated by dividing the number of days it is rented (104) by the number of days it is available to be rented (365). 104/365= 28.5%.
That example works where the entire cottage is being rented out. If, for example, you have an 8-room house, and are renting out 2 of the rooms then before you can figure out the percentage of expenses which are eligible to be claimed, you have to calculate the percentage of your house which is being used for the purpose of earning rental income. In this example, it is 2 rooms out of 8 rooms, or 2 divided by 8 (2/8) which is 25%. Then you take 25% of the total eligible expenses and you have the eligible expenses for the house… But you’re not done!
Since you’re likely not renting out 2 rooms for the entire year, you would need to then calculate the number of days that your property was being rented and if it was, for example, 60 days, then you have to figure out the amount the property was rented for the entire year (60/365), or 16.4% and then multiply the expenses against that (after multiplying it by 25%, as explained above).
There is a MUCH better way to calculate all of this, and that is by using TurboTax Online Premier which does all of those calculations for you, and guides you through other expenses which you may not have considered and may not have been mentioned here.
When is a Rental not a Rental?
Something important to keep in mind: When is a rental not considered to be a rental?
When it’s a business, of course.
If your rental property offers additional services such as meals or laundry services, you may in fact, be running a business in the eyes of the CRA.
No need to be alarmed, because if that is the case, there are a few changes which you will need to keep track of, one of the more important being that you will need to report your business income and expenses as self-employment income rather than rental income, and that means completing Form T2125, Statement of Business or Professional Activities, and including that form with your personal income tax return.
It is absolutely recommended that you keep all of your Airbnb related information together to make not only tax time much easier and less stressful, but it takes the stress out of CRA requests post-tax season. Having a well-kept calendar of your rentals and the other tax-related information is SO much easier than trying to sift through emails or relying on your memory. Something as simple as signing up for online billing for utilities can save time and hassle next spring – QuickBooks Self-Employed is a fantastic tool that comes to mind.
Remember, that if the CRA ever wants to verify information, and they ask for proof which you are unable to provide, they will deny your claim, and assess you. In the Canadian tax system, the onus is on the taxpayer to provide proof.
Even though keeping proper records is planning head too, this section warrants its own heading to bring attention to the fact that self-employed income does not have tax deducted at source as would occur with someone receiving a T4. As a result, setting aside a portion of your Airbnb income each time you have a renter is a very good idea. General rule of thumb is to set aside 25-30% of the income you earn for taxes, but even setting aside 10% from each renter will help lessen the hit at tax time.
Do I have to register for the GST or HST?
Let’s get right to the point here… Maybe.
Airbnb rental income becomes subject to the GST or 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).
While that was easy enough, it can get a bit complicated around who has to charge, collect, report and remit the GST or HST. 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 in any single calendar quarter – where a quarter is 3 months.
So if your revenue exceeds $30,000, then you must register for the GST/HST. You may, however, want to consider registering for the GST/HST voluntarily, as will be discussed shortly.
Keep in mind that Airbnb does not collect GST/HST from customers, so it’s up to you to the add GST/HST to whatever rate you charge for your space, and remit the tax to the government. Airbnb also does not share your information with the CRA – that would be a privacy breach – however, if the CRA gets a court order asking Airbnb for information related to users of their service, that information must be forwarded to the CRA, by law.
Let’s look at the GST/HST in further detail for a moment.
Registering for the GST/HST before being required to:
- Allows you to claim back from the CRA the GST/HST spent on expenses related to setting up your property to earn rental income
- Allows you claim back the GST /HST spend on any expenses related to your property which generates the rental income
Make sure you keep detailed receipts of the expenses you incur while hosting people in your space, as some of the items you purchase (like snacks or coffee for guests) are considered a legitimate expense
When you file your personal tax return, you would be required to file a GST/HST return, and claim back the GST/HST spent in the form of what is called an “Input Tax Credit”.
NOTE: Make sure you file, and pay on time to avoid any penalties and interest.
If you wait until you hit the $30,000 Small Supplier threshold:
- The day that you exceed the $30,000 Small Supplier threshold is the day you are required to register for the GST/HST and to begin tracking the tax, charging it, collecting it, reporting it 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 ones which were incurred after you are registered for the GST/HST.
Why Register Voluntarily?
If you are going to be purchasing a lot for your property to get it ready to rent, you will be able to recoup the GST/HST that you have spent even if you do not have any customers right away.
You should also pay special attention to how much income you are earning for all your sources. The extra income earned through Airbnb might cause you to move into a higher income tax bracket, or might result in you being ineligible for some benefit programs, such as the GST/HST credit, CCB, or OAS.