Provinces and territories all over the nation have been tightening regulations for short-term rentals (for example, Airbnb rentals) due to the rising demand for housing, especially in cities like Montreal, Toronto, and Vancouver.
Due to a recent amendment to the Income Tax Act, it is now even more crucial to abide by local laws governing short-term rentals, as failure to do so may prevent expenses from being used to offset the income, and lowering tax!
A “short-term rental” is defined as a residential property that is rented or offered for rent for periods of less than 90 consecutive days.
Therefore, while many rentals advertised on internet platforms will be caught, the majority of “normal” residential rental arrangements will not be subject to these expense denial rules provided they are not month-to-month contracts.
A short-term rental is deemed to be non-compliant under the Income Tax Act if it is situated in a Province or municipality that does not allow these kinds of rentals.
In provinces or municipalities where short-term rentals ARE allowed, a rental is considered non-compliant if it does not meet all local applicable registration, licensing, and permit requirements for short-term rentals.
If found to be non-compliant, the Income Tax Act now states that any otherwise deductible expenses will be denied, although the income will still be subject to tax of course!
If the property is non-compliant for only part of the year, expenses will be denied in a similar proportion.
For example, if the property was non-compliant for 36 out of 365 days in the year (around 10%), then 10% of the total rental expenses for the year would be denied.
The rules take effect from the 2024 tax year. However, in this first year, a property is considered to be compliant for the whole of 2024 if it was compliant at the end of the year.
This provides taxpayers with some time to ensure that all local requirements are complied with, if the property they are renting out is currently non-compliant.
Operating short-term rentals has become more cumbersome when it comes to local compliance over the past few years. It has now potentially also become more costly from a tax point of view!