In response to the growing popularity of short-term rentals and their impact on housing availability, the Canadian federal government has introduced new tax regulations effective January 1, 2024. These rules aim to ensure compliance with local laws and promote the availability of long-term housing options.
DENIAL OF EXPENSE DEDUCTIONS FOR NON-COMPLIANT SHORT-TERM RENTALS
Under the new regulations, property owners who operate short-term rentals without adhering to local licensing, registration, or permit requirements will face significant tax consequences. Specifically, expenses incurred to earn income from such non-compliant short-term rentals will no longer be deductible for income tax purposes. This includes costs such as mortgage interest, property taxes, insurance, repairs, and maintenance.
DEFINITION OF NON-COMPLIANT SHORT-TERM RENTALS
A short-term rental is considered non-compliant if it meets the following criteria:
- Residential Property: The property is used for residential purposes, including houses, apartments, condos, cottages, mobile homes, trailers, houseboats, or similar properties.
- Short-Term Rental: The property is offered for rent for periods of less than 90 consecutive days.
- Non-Compliance with Local Laws: The property does not comply with provincial or municipal regulations, such as:
- Operating in areas where short-term rentals are prohibited.
- Failing to obtain necessary licenses, registrations, or permits required by local authorities.
TRANSITIONAL RELIEF FOR 2024
To facilitate compliance, the government has provided transitional relief for the 2024 taxation year. If property owners ensure that their short-term rentals comply with all local licensing, registration, and permit requirements by December 31, 2024, they will be deemed compliant for the entire year. This means they can deduct eligible expenses incurred throughout 2024, even if they were non-compliant earlier in the year.
IMPLICATIONS FOR PROPERTY OWNERS
The denial of expense deductions can significantly increase taxable income, leading to higher tax liabilities. For example, if a property owner earns $50,000 in rental income and incurs $30,000 in related expenses, non-compliance would result in the inability to deduct these expenses, increasing taxable income to the full $50,000. At a marginal tax rate of 40%, this would result in $20,000 in taxes payable, compared to $8,000 if the expenses were deductible.
STEPS TO ENSURE COMPLIANCE
Property owners should take the following steps to comply with the new regulations:
- Understand Local Regulations: Research and understand the specific short-term rental laws in your municipality or province.
- Obtain Necessary Licenses and Permits: Apply for and secure all required licenses, registrations, or permits to operate a short-term rental legally.
- Maintain Accurate Records: Keep detailed records of all rental income and expenses, as well as documentation of compliance with local regulations.
- Consult a Tax Professional: Seek advice from a tax advisor to understand the full implications of these changes and to ensure compliance with both tax and local laws.
By proactively addressing these requirements, property owners can continue to benefit from short-term rental income while remaining compliant with tax laws and supporting broader housing availability goals.
If you need assistance, contact us today for a free consultation. We will review your facts and outline the steps necessary to resolve your tax matter.
SpenceDrake Tax Law – Tax Lawyers
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.