As the sharing economy continues to thrive, many Canadians are turning to platforms like Airbnb to earn extra income by renting out their properties. However, with this additional income comes the responsibility of understanding and complying with the tax obligations as an Airbnb host. In this comprehensive guide, we will explore the ins and outs of Airbnb income tax in Canada, including what needs to be reported, eligible expenses, GST/HST considerations, and more.
Reporting your Airbnb income correctly on your tax return is crucial to avoid penalties and potential audits. The Canada Revenue Agency (CRA) considers income earned from short-term rentals, such as those facilitated through Airbnb, as taxable income. This means that you are required to report your Airbnb income on your personal tax return and pay taxes on the profits generated. Having said that, when it comes to reporting your Airbnb income, you have two options: reporting it as rental income or business income.
The CRA determines the classification based on the services you provide to your guests. If you simply rent out your space and offer basic amenities like heat, light, parking, and laundry facilities, your income will be considered rental income. On the other hand, if you provide additional services such as cleaning, meals, and security, you may be classified as carrying on a business.
Thus, to determine your tax obligations, you need to assess whether you are operating your Airbnb rental as a business or as a rental. If you regularly rent out your property and provide services similar to those offered by traditional accommodations, the CRA may consider it a business. However, if you are occasionally renting out your property and only providing minimal services, it will be considered rental income.
To report your rental income on your tax return, you will need to fill out form T776 Statement of Real Estate Rentals. If you operate it as a business, you will report the income as business income on your personal tax return, using Form T2125 Statement of Business or Professional Activities.
One of the benefits of reporting your Airbnb income is that you can deduct eligible expenses to offset the income you earned. However, it is crucial to understand which expenses are deductible and keep accurate records to support your claims in case of a CRA audit.
Some common deductible expenses for Airbnb hosts include:
It's important to note that only the portion of these expenses that relates to the rental activity can be claimed. The eligible portion depends on the percentage of your property that is used for earning rental income, as well as the length of time it is available and used for that purpose (such as the number of days per year). For example, if you rent out a portion of your house, you can only deduct expenses related to that specific area for the number of nights the area was rented.
In addition to current expenses, you may also have capital expenses associated with your rental property. Capital expenses are generally costs incurred to improve the property or extend its useful life. Examples include renovations, additions, or substantial repairs that enhance the property beyond its original condition.
Unlike current expenses, capital expenses cannot be deducted all at once. Instead, they are deducted over a period of several years as capital cost allowance (CCA). The CCA allows you to deduct a percentage of the property's capital cost each year. The specific CCA rate depends on the type of rental property and the date it was acquired.
It's important to keep track of both current and capital expenses, as they can have an impact on your taxable income and the amount of tax you owe.
To calculate the eligible expenses for tax purposes, you need to prorate them based on the portion of your property that is used for rental purposes. Let's look at some examples:
When renting your entire home, you need to calculate the number of days or weeks that you rented as a percentage of the total time you owned the home. This percentage is then applied to your eligible expenses to earn the Airbnb income to determine the deductible amount. For example, if you incurred $10,000 in eligible expenses related to the rental income for the year but you only rented the property for 80 days of the year. This means that you can only claim 22% or $2,200 of your annual expenses.
If you rent out part of your property for the year, you can claim only the expenses that relate to the rented area. For example, if you rent out 25% of your house, you can only deduct 25% of the eligible expenses for that area.
Using the example above, if you only rent out your house for 80 days, this means you can deduct 25% of the eligible expenses already prorated at 22%. This means the eligible expense deduction would be $550 ($2,200*25%).
Please note that you can calculate the eligible expenses using square footage, the number of rooms rented, or any other reasonable method.
Another important aspect of Airbnb income tax in Canada is the Goods and Services Tax (GST) or Harmonized Sales Tax (HST). GST/HST applies to short-term housing rentals for periods less than 30 consecutive days while long-term residential rentals are exempt from GST/HST. If your total annual revenue from your Airbnb activities exceeds $30,000 in a 12-month period, you are required to register for and collect GST/HST from your guests.
Failure to do so can result in penalties and interest charges. If you are a self-employed individual or a business owner in Canada, it is important to be aware that if you are already GST/HST registrant, you are required to collect sales tax on Airbnb rentals, regardless of your income.
Please note that Airbnb does not handle the collection of GST/HST from customers. As a host, it is your responsibility to include the appropriate GST/HST in the rate you charge for your space and submit the tax to the government. It's important to track, charge, collect, report, and remit the GST/HST as required by the CRA.
Even if you don't meet the $30,000 threshold in a 12-month period, it is still beneficial to register for GST/HST voluntarily. It allows you to claim input tax credits for the GST/HST you pay on your business expenses such as advertising, maintenance, cleaning services, utilities, etc. This allows you to recover the GST/HST paid on expenses related to setting up your property for rental purposes and any other eligible operating costs. Please note that the recovery on your GST/HST will depend on the rental usage of your home.
One of the key considerations for Airbnb hosts in Canada is the potential capital gains tax implications when you sell your principal residence or house. Capital gains tax is a tax imposed on the profit made from the sale of an asset, such as a property. When you start renting out personal property such as your principal residence, it is considered a change in the use of that property for income tax purposes.
This means that if you decide to convert your house into a rental property, you will be treated as if you have sold your property at its fair market value (FMV). This can result in a capital gain that is subject to tax. The capital gain tax will be calculated on the difference between the FMV at the time of the change and its adjusted cost base (ACB).
However, there are certain exemptions and exclusions that can help reduce or eliminate the capital gains tax. The principal residence exemption, for example, allows you to exclude any capital gains from the sale of your primary residence. If you rent out a portion of your home on Airbnb, you may still be eligible for a partial exemption.
There is also a tax election available that will allow one to avoid reporting any capital gain from the deemed disposition of the rental property in the year of the change in use. However, there are specific guidelines for making this election, and it's important to be cautious in order to avoid unintentionally revoking it. It is recommended to speak to a tax professional that can provide expert guidance to ensure you are compliant with all the rules and regulations.
In addition to the income tax implications, we also should not overlook the important GST/HST implications that can arise when renting out your home. If your home is rented out for at least 90% of the time in rental periods shorter than 60 days, it may no longer be considered a "residential complex". This means that any future sale could be subject to GST/HST, which might come as a surprise to potential buyers who have to pay additional taxes on their purchase.
Related: Understanding Capital Gains Tax In Canada
Renting out your property on Airbnb may have implications for your home insurance coverage. It's crucial to review your insurance policy and speak with your insurance provider to ensure that you have appropriate coverage. Not all insurance policies cover short-term rentals, and you may need to make adjustments or obtain additional coverage to protect your property and liability.
By obtaining the right insurance coverage, you can mitigate risks and protect yourself financially.
While it is important to meet your tax obligations as an Airbnb host, there are strategies you can employ to minimize your tax liability. Here are some tips to consider:
As an Airbnb host, you are required to maintain proper records and documentation to support your income and expense claims. The CRA may request these records in case of an audit or review, so it is essential to keep them organized and accessible.
Some key records and documents you should keep include:
By keeping accurate records and documentation, you can easily substantiate your income and expenses, ensuring compliance with CRA's requirements.
There are several misconceptions surrounding Airbnb income tax in Canada. It is crucial to separate fact from fiction to avoid potential pitfalls and non-compliance. Here are some common misconceptions debunked:
| 1. Misconception: Airbnb income is not taxable if it falls below a certain threshold. Fact: All income earned from Airbnb rentals, regardless of the amount, is considered taxable income which needs to be reported on your personal return. |
| 2. Misconception: Only full-time Airbnb hosts need to report their income. Fact: Whether you rent out your property occasionally or on a regular basis, you are required to report your Airbnb income. |
| 3. Misconception: Airbnb income is exempt from GST/HST. Fact: Depending on your rental income, you may be required to register for and remit GST/HST on your Airbnb rentals. |
| 4. Misconception: The CRA does not actively pursue Airbnb hosts for tax compliance. Fact: The CRA has been increasing its efforts to ensure Airbnb hosts comply with tax regulations, including audits and penalties for non-compliance. The CRA takes non-compliance seriously and has the authority to impose penalties and interest on unpaid taxes. |
By understanding the facts and dispelling these misconceptions, you can ensure you meet your tax obligations and avoid unnecessary penalties or audits. If you have not been declaring Airbnb income- please talk to us about a Voluntary Disclosure to CRA which can potentially eliminate the associated penalties.
In conclusion, understanding and complying with Airbnb income tax regulations in Canada is crucial for hosts to avoid penalties and unnecessary tax burdens. By properly reporting your income, documenting your expenses, and seeking professional advice when needed, you can navigate the world of Airbnb income tax in Canada with confidence. So, enjoy the benefits of being an Airbnb host while fulfilling your tax obligations responsibly. If you have any questions or concerns about Airbnb income tax, please contact us. We are here to help!
If you want to learn more about other tax and accounting topics, explore the rest of our blog!
Disclaimer
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.
