Airbnb Tax Considerations for Hosts
Posted on November 10, 2021
Over the past year, we have experienced significant restrictions on international travel as a result of the COVID-19 pandemic. While this has certainly been a very frustrating time, it has created a unique opportunity as the demand for Airbnb rentals has continued to surge with inter-provincial travel hitting record highs.
Canadians have been renting out their homes and/or secondary properties, primarily through leveraging Airbnb’s vast network as a way to generate an additional source of passive income. If you’re considering turning your property into an Airbnb, it is important to consider the tax implications behind doing so. In this article, we’ll explore the 4 main areas you should consider, prior to becoming an Airbnb host.
Consideration #1: Business Income vs Property Income
The first key consideration to be aware of is that for income tax purposes, there is an important difference between property income and business income – this distinction is not always clear, but can have a significant impact on your income taxes payable. The CRA’s prescribed guidance indicates that whether your rental income is considered to be from property or business, comes down to the number and types of services you are providing for your tenants.
In most cases, if you rent space and provide only basic services, such as heat, light, parking, and laundry, you would be earning property income.
However, if you are providing additional services, such as cleaning, security, and meals, the income you earned may be considered to be business income. In other words, the more services that you provide, the higher the likelihood that your Airbnb rental operation may be considered a business.
If you would like to learn in more detail the differences between business income vs property income, and what that could mean for you from an income tax perspective, please feel free to give our office a call.
Consideration #2: HST/GST Implications
The second key consideration to be aware of is whether you need to charge GST/HST. Short-term housing rentals for periods less than 30 continuous days are taxable for GST/HST purposes. Furthermore, if rental revenues exceed $30,000 in a 12-month period, you are required to become an HST registrant and collect GST/HST on this income. You may also consider voluntarily registering before exceeding $30,000 in income. Long-term residential rentals are exempt from GST/HST.
This is particularly important when purchasing a property that is subject to GST/HST is for use exclusively in short-term rentals. If you are an HST registrant prior to the closing date of your property, you will be required to remit the GST/HST directly to the CRA rather than paying it to the seller. 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 typically the preferable route, rather than paying GST/HST to the seller and later filing a GST/HST return requesting a refund from the CRA, which could potentially cause cash flow issues due to timing differences.
Finally, if you are an HST registrant and collect GST/HST from your customers, you may be able to recover the GST/HST you pay on your expenses, including advertising, maintenance, utilities, and property management fees.
Consideration #3: Eligible Expenses - Operating vs Capital
The tax treatment of expenses incurred for an Airbnb rental depends on whether the expense is considered capital in nature or an operating expense.
Capital expenses are typically those that provide a lasting benefit or advantage, such as when a property is being renovated. Operating expenses, on the other hand, are ongoing expenses such as electricity, heat and hydro. These expenses are recurring, and don’t provide a long-term, enduring benefit. Other examples include mortgage interest, maintenance, and property taxes. If you are renting out a portion of your home, such as the basement, then these operating expenses may be deducted on a pro-rated basis, typically using square footage. This is further pro-rated by the number of days in the year that your property is being occupied by Airbnb customers.
For expenses incurred that are capital in nature, these expenses must be deducted over a number of years based on the capital cost allowance (CCA) rate.
Consideration #4: Principal Residence Exemption (PRE)
Many new Airbnb hosts do not take into consideration the impact of renting their personal property on the principal residence exemption. The principal residence exemption allows for homeowners to avoid paying tax on any capital gains they have realized on their primary residence.
The CRA defines a principal residence as the residence being “ordinarily inhabited” within the calendar year. However, the CRA does not specify an exact duration of time to be considered “ordinarily inhabited.”
Typically, property that is primarily being used to generate income will not qualify for the principal residence exemption. This means that if you were to purchase a property strictly for the purpose of converting it into an Airbnb, it likely would not qualify for the PRE. On the other hand, if you are simply using a room in your home as an Airbnb rental, the property will more than likely qualify for the PRE, if you can demonstrate that you are living there regularly, in some capacity.
As you can see above, there are several factors that you must take into consideration prior to making the decision to becoming an Airbnb host. There is no doubt that Airbnb has become a popular source of passive income for many Canadians, particularly over the past year as international travel has been restricted, leading to a surge in inter-provincial travel. However, it would be prudent to consult your accountant to ensure there are no surprises come tax season. If you have any questions related to the above, or would like to discuss further, please feel free to contact us directly.