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From UFile's tax expert Gerry Vittoratos.

Changes to short-term rental rules

Jan 9, 2024 by Gerry Vittoratos
In its most recent fall economic statement, the federal government announced important changes to the tax treatment of short-term rentals such as those offered through Airbnb and Vrbo. Let’s find out what they are.

How is the income from short-term rentals reported?

Income from short-term rentals is considered rental income and added to your total income. Expenses related to making the property available for the short-term rental are deductible against the rental income; these include property taxes, condo fees, utilities, mortgage interest, property insurance, capital cost allowance, etc.

Tax is payable on the net income gained from the rental, i.e. the total rental income less the total expenses.

We wrote extensively on short-term rentals in a previous blog article.

Expenses no longer deductible for some

Per its announcement, the federal government is proposing to disallow the deductible expenses (see above) that can be claimed against rental income for property rented on a short-term basis using sites such as Airbnb and Vrbo.

This rule would apply to property owners in provinces and municipalities where short-term rentals are prohibited. It would also apply to property owners who are not compliant with provincial or municipal licensing, permitting, or registration requirements.

This new rule would come into effect for the 2024 tax year.

What will be the repercussions?

This will increase the tax payable on the income earned from such short-term rentals. The following example illustrates this point:

John owns a condo in Montreal that he rents on a short-term basis to vacationers through Airbnb. Although short-term rentals are allowed in John’s borough, he has not registered his condo with the provincial government as is required in Quebec.

John’s rental income from Airbnb for the year was $20,000. His expenses were $3,500 for property/school taxes, $4,000 for condo fees, $1,000 for insurance and $1,000 for electricity/heating for a total of $9,500. After deducting his expenses, John’s net income from the rental was $10,500. Assuming a tax rate of 33%, John expected to pay $3,465 of income tax on the short-term rental of his condo ($10,500 x 33%).

Because John did not register his condo with the provincial government, the property is now subject to the new rule disallowing the expenses. Therefore, the rental income that will be taxed is the full amount of $20,000, instead of $10,500, since his expenses are no longer deductible. John’s tax payable will now be $6,600 ($20,000 x 33%) instead of $3,465.

In the example above, John can avoid this new rule simply by registering his condo with the provincial government. However, property owners who rent on a short-term basis in areas where these rentals are prohibited will be subject to it.

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Presented by UFile's tax expert
Gerry Vittoratos
MTax

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