Looking to generate income by renting out your apartment or secondary property? Join the ranks of thousands of hosts using the Airbnb service to do just that! But first, we must look at the tax consequences of doing so, as there are rules regarding reporting rental income, collecting the lodging tax and remitting the appropriate sales tax when applicable.
How to report Airbnb Income
When earning rental income, you must declare the gross rental income and associated expenses on your personal or corporate tax return depending on if you are operating personally or through a corporation.
The CRA has two ways of viewing rental income; either it’s business income or passive income for income tax purposes and the distinction is not always clear cut.
Typically, if you rent out space and include essential services such as parking, utilities and laundry services – chances are this will be seen as passive income.
If you operate more like a bed and breakfast or an inn where you provide additional services to your guests such as cleaning services, meals and security – the rental income will most likely be considered as business income and usually taxed at a lower bracket. As a rule of thumb, the more services and amenities you provide to guests as a host, the higher the chances that it will be considered business income.
Depending on the province, there are municipal as well as provincial lodging taxes that need to be collected from the guests. In Canada, Airbnb currently includes the lodging tax as part of the reservation and remits the lodging tax to the jurisdiction in question. In Quebec, the lodging tax is 3.5% of the listing price for reservations up to 31 nights - Source
If you are registered to collect sales tax, you will need to ensure the collection and remittance of the federal and provincial amounts. You are also entitled to recover sales tax paid on expenses to generate the rental income.
Suppose you are not registered to collect sales tax and are considered a small supplier, meaning you do not exceed more than $30K in rental income in a calendar quarter or four consecutive calendar quarters. In that case, you are not required to collect sales tax. Naturally, you will also not be able to recover sales tax paid on any rental expenses - Source
Here are some of the most common expenses you can claim on your rental property:
· Mortgage interest
· Property taxes
· Maintenance costs (housekeeping)
· Home insurance
· Condo fees
· Various others - Source
If your home is only rented part of the year, you will need to prorate the expenses according to the number of days it was rented by the total number of days in the year.
There are long-term implications of renting out your home for tax purposes such as the ability to claim the principal residence exemption when you sell it. Additionally, if the home is rented 90% or more for short durations of less than 60 days, it may lose its status as a ‘residential complex’, which means there will be sales tax on the subsequent sale of the home, which may deter potential buyers. Situations are on a case-by-case basis and it’s important you speak to a tax expert for guidance.
Lastly, keeping detailed records of the rental income and associated expenses are part of the hosts' responsibility in the event of an audit by the federal or provincial government.
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