Real estate is a booming business in Canada, whether buying or renting property. Platforms like Airbnb and VRBO allow homeowners to earn some quick bucks by renting the house for less than 90 days. However, the growing trend of short-term rental income attracted the attention of the Canada Revenue Agency (CRA), and new tax rules were introduced on January 1, 2024.
New Tax Rule for Short-Term Property Rental
Property owners who rent out their property can deduct expenses such as property tax, maintenance, repairs, and mortgage interest from their rental income. However, if you are renting your residential property for less than 90 consecutive days, it is considered a short-term rental.
Individuals, corporations, and trusts operating short-term rental operations must secure permits and licenses from the local municipality or province where the property is located. That property becomes non-compliant if you fail to obtain these permits and licenses.
The CRA will not allow non-compliant properties to deduct the expenses incurred on the property from their taxable income. It means you will have to pay tax on the entire rental income.
Note that this rule of meeting compliance requirements is for short-term rental only. Suppose you rented your house for 10 months (long-term rent) and then rented it for 50 days without obtaining a short-term property license. The expenses incurred on the property for those 50 days would not be tax deductible.
The Limited Time Exemption for 2024
Since the rule took effect on January 1, the CRA has given a year to adjust to the new rule. You can obtain the necessary registration, licensing, and permit requirements by December 31, 2024. Each locality and municipality has different rules. A professional tax expert can help you navigate these rules and get yourself compliant.
It is essential for every homeowner renting the property to understand this rule to safeguard themselves from a hefty tax bill and penalty for non-compliance.
The Hefty Cost of Non-Compliance for Short-Term Property Rental
After December 31, the period of transitioning to the new rule will expire, and the CRA could impose a hefty penalty and interest on non-compliance. We will take an example to give you an idea of the cost of non-compliance.
Suppose Jerry owns an apartment, puts it on Airbnb for short-term rentals, and earns $45,000 in a year. He incurs cleaning, repairs, maintenance, and other charges worth $20,000, reducing the profit on the property to $25,000. Jerry has not been updated on the new rules and has failed to get a license from the municipality.
He has until December 31 to get the license. From next year onwards, the CRA will refuse the $20,000 deduction and tax him on full rental income of $45,000. If he is in a higher tax bracket of 40%, he will incur a tax bill of $18,000 (40% on $45,000) instead of $10,000 (40% on $25,000).
Beyond this, Jerry will also face penalties and interest on the unpaid tax. And once the CRA gets its hands on non-compliance, it could audit and reassess retroactive tax bills. The more it digs and finds past tax liabilities, the more penalties and interest it will impose.
A once profitable apartment could turn into a loss-making venture. If you decide to sell the apartment to pay those tax liabilities, note that Goods and Service Tax (GST) applies to the gain on the sale of short-term residential property.
How GST/HST Works For Short-Term Rental Properties
Sale of property: If your property falls under the definition of short-term rental properties at the time of the sale, GST/HST (Harmonized Sales Tax) will apply to the gain on the sale of the property. Suppose John sells his apartment that he purchased for $150,000 for $300,000. The transaction is deemed to be the sale of a residential complex that does not attract GST/HST. However, John has been using his apartment to lease for 60 days in the last four months, which converted the apartment into a short-term rental property. Hence, it attracted GST/HST on the $150,000 capital gain on the sale of the property.
An unplanned sale without considering tax implications cost John a hefty tax bill. Hence, it is recommended that you consult a tax expert before making any big transaction. The expert is well-versed with the tax laws and can analyze the transaction from the CRA’s perspective and guide you on how to proceed so you can qualify for the CRA tax benefits.
Rental income: While GST/HST applies on the sale of property, rental income is also subject to HST if your rental period is less than 28 consecutive days or you use the property consistently as a short-term rental. If you earn more than $30,000 in short-term rental income in four consecutive calendar quarters, you must register for GST/HST.
The short-term rental operations landscape is dynamic, and rules keep changing. Not complying with these rules can have significant financial consequences. It is advisable to seek professional help before undertaking property-related transactions, whether leasing or sale.
Contact McCay Duff LLP in Ottawa to Help You Stay Tax Compliant
A professional tax consultant is updated with the tax laws and can help you comply. Not only can he/she protect you from hefty penalties, but it also helps you avail yourself of any tax benefits the CRA offers, making your property profitable. At McCay Duff LLP, our accountants and tax consultants can provide services such as real estate tax planning and accounting with supporting documents. To learn more about how McCay Duff LLP can provide you with the best accounting and tax expertise, contact us online or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.
