Tax Change: Advise Taxpayer About Short-Term Rentals

Evelyn Jacks

Taxpayers who own a residential property and rent it out must be aware that income reporting is required in most cases.  Further if the rental was for periods of less than 90 days, expenses to offset that income could be restricted.  These Short Term Rental (STR) rules are new for the 2024 tax year.  Here’s what you need to know based on recent directives from Finance Canada and the CRA, which includes a brief reprieve for some STR owners in 2024:

Income Reporting.  If you are earning rental income from tenants in a residential property you own you must generally report it, although there are a few exceptions to this rule.  For example, if you are collecting rent a family member to cover the costs of groceries or utilities, that income is not reportable.  It is considered to be a cost-sharing arrangement by the CRA.  In fact, were you to report this, it would not be possible to claim a rental loss.  However, whenever rent charged exceed the expenses to own and keep the property up, the net amount of income is reportable and taxable.

Expense Reporting.  Expenses of a rental property break down into two categories:  operating expenses and capital expenditures.

Operating expenses include recurring costs such as interest and property taxes, utilities and maintenance and repairs for example.  Capital expenses occur when the building, furniture or fixtures are acquired, or the useful life of the property is extended with a significant replacements ( a whole roof for example, as opposed to a few shingles – the former is capital in nature; the latter is an operating expense.)  Capital assets are subject to depreciation and the tax system allows a deduction for this through a Capital Cost Allowance system.  Assets are categorized into classes and a rate of depreciate is applied on a declining balance method.

Non-Compliant Properties.  Starting in the 2024 tax year, none of these expenses will be claimable at all when rental income has been earned on a short term basis (less than 90 days) and the property is “non-compliant.”

Here’s how CRA describes a non-compliant short term rental property:

• is located in a province or municipality that does not permit short-term rentals to operate at that location; or
• does not comply with all applicable provincial or municipal registration, licensing and permit requirements for operating a short-term rental. 

The federal government is making sure that provinces and municipalities have funding to enforce this.  On December 3, 2024, it announced a $50 Million Short Term Rental Enforcement Fund so that municipalities “will have the tools they need to ensure compliance with their existing short-term rental regulations. . . to increase enforcement and compliance activities, such as hiring enforcement staff, managing complaints, and conducting inspections. Applications from municipalities for funding can be submitted between December 16, 2024, and January 24, 2025.”

The news release goes on to say that there are an estimated 235,000 short-term rentals across Canada and the goal is “bringing the non-compliant units back to the long-term housing market, and helping preserve our existing housing supply.”

A Reprieve for 2024.  Finance Canada announced in a news release on January 22, 2025 that if a short-term rental is compliant with all applicable provincial or municipal registration, licensing and permit requirements for operating a short-term rental by December 31, 2024, the short-term rental will be deemed t o be compliant for the entire 2024 tax year.   

However this exception will only apply to individuals, including corporations, and partnerships for the 2024 tax year.

Other Restrictions.  The Income Tax Act places a number of other restrictions on the claiming of rental expenses.  For example, it’s not possible to create or increase a rental loss with a capital cost allowance claim.  Further, when rental losses are consistently claimed year over year, rental losses may be denied entirely as there is no potential for net income or profit to arise.

The Burden of Proof.  Don’t be surprised if more STR units are selected for audit given this extra funding provided to municipalities.  That means, at the starting gate, that accurate books and records that support the rents collected and expenditures made must be kept.  The government also wants documentation that confirms the residential property was located in a province or municipality that permits the operation of short-term rentals.  In addition, be prepared to show that the rental complied with all provincial and municipal registration, licensing and permit requirements. 

It’s interesting that in describing the rules above, CRA also invites readers to “submit a lead” if they suspect anyone of cheating under these or other tax rules. 

Bottom Line.  This is a complex area of tax law, now even more so with the short term rental rules and new local vigilance. 

Be sure to tune in for the CE Savvy Mini-Summit in which Rental Property Reporting will be covered in detail.