Air BnB and VRBO hosts could be paying tax on their Gross Rental Income if they're not compliant with local regulations!
The Canada Revenue Agency (CRA) has introduced significant changes to how short-term rentals are taxed, specifically targeting non-compliant properties. These changes, which began in 2024, impact small business owners who are renting out properties for less than 30 days on platforms like Airbnb, VRBO, or other similar services.
For example, if you earn $20,000 in short-term rental income and have condo fees of $5,000 and mortgage interest of $10,000, and you are deemed to be non-compliant, you'll be denied the mortgage interest and condo fees and could be taxed on the full $20,000!
Here’s a closer look at what these changes mean for you.
Denial of tax deductions for non-compliant rentals
One of the biggest updates is that the CRA will deny tax deductions for expenses related to non-compliant short-term rentals. If your rental property is not in full compliance with local municipal, provincial or federal regulations, you won't be able to write off common rental-related expenses. These include:
- Property maintenance costs include repairs, cleaning and any improvements you’ve made to keep the property in good condition.
- Management fees: Fees paid to property management companies, cleaners or service providers.
- Utilities and insurance: Costs for utilities like electricity, water, heating or insurance for your rental property.
- Mortgage interest: Interest paid on loans related to the property you’re renting out.
For these expenses to be eligible for tax deductions, the CRA requires that your rental meet all legal obligations — including having the proper business licenses, meeting zoning regulations and operating within any restrictions set by your municipality. If you fail to meet these requirements, you’ll be unable to use these expenses to reduce your taxable income.
What qualifies as non-compliant?
A rental property is considered non-compliant if it operates in an area where short-term rentals are prohibited or fails to adhere to required registration, licensing and permit rules within your city. Non-compliant rentals can include:
- Rentals operating without a valid business license: Many cities now require short-term rental owners to obtain a license before renting out their properties.
- Rentals in locations with zoning restrictions: Some cities or neighbourhoods have zoning laws that prohibit short-term rentals or limit them to specific areas.
- Failure to comply with local health and safety standards: Some municipalities have health and safety requirements that short-term rental properties must meet, such as ensuring proper fire safety measures or accessibility features.
Penalties for non-compliance
In addition to the loss of tax deductions, non-compliant short-term rental owners may face penalties, fines or other enforcement actions from local municipalities. These can include:
- Fines for operating without a license: Many cities impose fines for owners renting out properties without obtaining the required licenses.
- Orders to cease operations: Some municipalities may require non-compliant property owners to cease renting their properties altogether until they bring their operations into compliance.
- Back taxes: In some cases, local authorities may demand payment of taxes owed from past periods of non-compliance, including penalties and interest.
How to avoid non-compliance
Here are some practical steps you can take to avoid the negative tax consequences and penalties associated with non-compliant rentals.
- Check local regulations: Understand your city or municipality's rules and regulations regarding short-term rentals. This includes licensing, zoning and any specific restrictions on the duration of rentals.
- Obtain necessary licenses: If required, apply for the appropriate business licenses or permits to operate legally.
- Track your expenses carefully: If you comply, continue to track all rental-related expenses accurately. Keep receipts and documents that prove your expenses are legitimate business costs.
- Consult a tax professional: If you’re unsure about your compliance status or how the new tax rules apply to your situation, speaking with an accountant is a good idea. They can help ensure you meet all legal requirements and maximize your deductions.
By staying compliant with local regulations and keeping your property in good standing with the CRA, you can avoid the negative financial and tax impacts of non-compliance while keeping your short-term rental business profitable.
If you’re unsure how these changes may impact your specific situation, consult with a tax professional familiar with real estate and rental property regulations.
Read more about Corporate Tax topics that may be helpful to you and your small business.
