Tax considerations for Airbnb hosts

Have you taken advantage of the surge in demand for cottage rentals and rented out your cottage or summer home? If so, you're not alone. Thousands of Canadians are renting out their home or secondary property—using Airbnb or another online platform. When joining this growing marketplace, you should consider the tax implications.

Let's take a closer look at the income tax and GST/HST considerations that affect the finances of Canadian short-term hosts.

How to report Airbnb income

Whenever you earn income from renting your home, you need to report the gross rental income and related expenses on your tax return.

For income tax purposes, a distinction is made between income from property and income from business, and it's 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 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) and declared on line 126 of your personal income tax return.

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. As a rule of thumb, the more services you provide as a host, the greater the chance that your rental operation will be considered a business.

Do I need to charge GST/HST?

Your Airbnb rental income may be subject to GST/HST. This is because short-term housing rentals for periods less than 30 continuous days are taxable for GST/HST purposes. Long-term residential rentals are exempt from GST/HST. If short-term rental revenues (plus income from any other commercial activity you may have on an associated basis) exceed $30,000 in a 12-month period, you're required to register and collect GST/HST on this income. Note that you should also determine if a provincial sales tax or other local tax/levy applies on short-term housing rentals.

If you purchase a new or substantially renovated house that is subject to GST/HST and is for use exclusively in short-term rentals, you may consider registering for GST/HST voluntarily before exceeding $30,000 in income.

If you do register for GST/HST before the closing date of your purchase, you will be required to remit the GST/HST directly to the CRA on your own return, rather than paying it to the seller. In that case, if you are eligible for a full recovery of the GST/HST you would claim this on the same return, resulting in no net payment of GST/HST. This is generally preferable to paying GST/HST to the seller and later filing a GST/HST return requesting a refund from the CRA, especially given that banks will typically not finance amounts related to recoverable GST/HST.

It's important to note that mixed-use properties (properties that include both taxable and exempt accommodation such as short-term and long-term accommodation in a single property) are subject to rules that are more complex and you should discuss your activities with an indirect tax specialist to confirm the appropriate sales tax treatment.

As of July 1, 2021, new rules apply to platform-based short-term accommodation. The aim is to ensure all supplies of short-term accommodation are subject to GST/HST when supplied through a digital platform with the tax being collected by either the property owner or an accommodation platform operator. Generally, accommodation platform operators will only collect GST/HST when the property owner is not GST/HST registered.

The new rules include some additional considerations for owners/suppliers of short-term accommodation:

• Accommodation platform operators aren't required to collect GST/HST on service charges related to facilitating the supply of the accommodation billed to non-GST/HST registered third-party property owner/suppliers of short-term accommodation.
• Fees billed by accommodation platform operators for services they provide to help guests find and book accommodation and in facilitating the transactions between the guest and the third-party property owner/supplier continue to be taxable for GST/HST.

For a comprehensive review of these new rules, please see our article, Digital Sales Tax in Canada.

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 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 expenditures that extend the useful life of your property or improve it beyond its original condition are usually capital expenses.

Current expenses

You may claim a prorated portion of many current expenses when you rent out your home through Airbnb. These expenses include:

• Mortgage interest
• Property taxes
• Utilities
• 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, 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're 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, 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 GST/HST?

If you register and collect GST/HST on the rental income, you may be able to recover GST/HST paid on certain operating costs, such as:

• Referral fees to a website
• Advertising
• Maintenance and housekeeping expenses
• Utilities
• Property management fees

Capital expenses

Unlike the current expenses noted above, capital expenses can't be deducted all at once and instead must be deducted over a period of several years as capital cost allowance (CCA). The CCA you can claim depends on the type of rental property you own and the date it was acquired. In very simple terms, you can deduct a percentage of the property's capital 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 the acquisition or improvements to the home, which are both 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.

When you begin renting a personal property, other than incidentally or occasionally, you're considered to have changed the use of that property for income tax purposes. As a result, there are significant income tax consequences that must be considered. Read our article, Tax Q&A: Tax Planning Strategies for Cottage Owners, for more information on these income tax considerations.

And let's not forget about the significant GST/HST consequences that may also arise if you rent out your home. If your home is rented 90% or more of the time for rental periods of less than 60 days, it may lose its status as a "residential complex". If this occurs, any subsequent sale becomes subject to GST/HST, which may come as a surprise to prospective buyers when faced with having to pay GST/HST on the purchase.

However, if you later decide to stop or scale back the rental of the home and it changes to a personal residence (or exempt long-term rental), you will need to pay GST/HST to the CRA based on the fair market value of the home when this change occurs. In some circumstances, you may be able to apply for a rebate to recover some of this tax.

Keeping records

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.

The decision also adds to your recordkeeping responsibilities. Make sure you keep detailed records of all the rental income you earn and the expenses you incur. It's also beneficial to log your own personal use of the home throughout the year to support its use as a personal residence. You can validate your purchases and operating expenses with supporting documents such as invoices, receipts, and contracts.

For more information on getting your taxes in order when renting out a property, contact our Canadian tax services team.