Thousand of Canadians use AirBnB or another online platform to rent out their homes. If you’re considering joining this market, be careful about the tax implications.
Here is a closer look at how using personal assets to earn revenue impacts your taxes.
Airbnb income: How to report it
Your tax return must include gross rental income and any related expenses.
Tax law distinguishes between property income and business income, and it is not always obvious which one applies to your rental income. Canada Revenue Agency (CRA) determines this based on the types and number of services you provide to your renters.
When you rent space and provide basic services, such as heat, light, parking, and laundry, you generally earn rental income. In this scenario, you must record your rental income on form T776 (Statement of Real Estate Rentals) and declare it on line 126 of your personal income tax return in this case.
If, on the other hand, you operate more like a bed and breakfast and provide extra services to your guests, such as cleaning, security, and meals – you will need to record any revenue as business income on your personal tax return. The more services you offer as a host, the more likely you will be regarded as a company.
Is GST/HST required?
It’s possible that your revenue from the rent on Airbnb is liable to GST/HST. The reason for this is that short-term dwelling rent is subject to GST/HST. Long-term rentals do not require GST/HST. You must register and collect GST/HST if your short-term rental revenues (including income from any other commercial business you may have on a related basis) reach $30,000 in a 12 month period. A short-term home rental might also be subject to provincial sales tax or other local taxes.
Consider voluntarily registering for GST/HST before earning more than $30,000 if you purchase a new or substantially renovated residence that is subject to GST/HST and will be used only for short-term rentals.
You must remit GST/HST to the CRA rather than pay it to the seller prior to closing your acquisition. If you are qualified for a complete GST/HST recovery, you would claim it on the same return, resulting in no net GST/HST payment. This is often preferable to paying GST/HST to the vendor and then submitting a GST/HST return asking a refund from the CRA, especially considering that banks would not normally finance recoverable GST/HST amounts.
A mixed-use property, such as short-term and long-term accommodations in one property, will be subject to a more complex set of rules, and you should consult a tax specialist to confirm the appropriate sales tax treatment.
How to deduct Airbnb expenses
A capital expense or a current expense may result in different tax treatment:
- Current Expenses: recurring expenses such as energy that don’t generate a long-term return
- Capital Expenses: often provide a long-term gain or advantage
Renovations and repairs needed to make your house leaseable, as well as expenditures that have a long-term impact on its functionality, are usually classified as capital costs.
What are the Current Expenses?
When you rent out your house on Airbnb, you may claim a prorated percentage of many current expenditures. Among these costs are:
- Mortgage
- Utilities
- Property taxes
- Supplies for the purposes of renting (new sheets, soap and shampoo, dishes, etc)
- Maintenance (painting, housekeeping, electrical and plumbing repairs, etc)
- Home insurance
- Condominium fees (if the rental income is from a condominium unit)
How to Calculate the current expenses
If you rent out your entire house on Airbnb, you must compute the number of weeks or days you welcomed guests as a percentage of the total time you owned the property in the year. You must next prorate your charges based on that proportion. For example, if you rented out your house in March and April, you might claim around 17% (61/365 or 2/12) of eligible expenses.
If you merely rent out a portion of your home, you can deduct the portion of your costs that are related to the rented section. For example, by renting out 1,500 square feet of a 3,000-square-foot house, you would be able to deduct 50% (1,500/3,000) of the costs that were previously prorated at 17 percent. To determine your acceptable cost, you can also use the square metres or the number of rooms in your house.
What are the Capital Expenses?
To fully deduct capital expenses as capital cost allowances (CCA) you will need to spread them over several years. You can claim CCA depending on the type of rental property you own and when you bought it. Simply put, you can deduct a percentage of capital cost of the property over a period of years.
Last things before renting your property
When you rent out a property other than inadvertently or infrequently, you’ve altered the usage of the property for income tax purposes. As a result, there are important tax implications to consider.
Not to mention the enormous GST/HST implications that might emerge if you rent out your house. You may lose your property’s status as a “residential complex” if you rent 90% of the time for less than 60 days. In this scenario, the subsequent sale would be subject to GST/HST, which may shock potential purchasers when GST/HST is required to be paid on the sale.
If, subsequently, you wish to terminate or reduce the rental of the house, the CRA will require you to pay GST/HST based on the fair market value of the home. You may be able to request a refund to recoup part of this tax in certain situations.
