In a release on Wednesday, the Canada Revenue Agency (CRA) reminded taxpayers about the new income tax rules for short-term rentals and the transitional relief for the 2024 tax year. If your client rents a residential property for short periods, they must comply with provincial or municipal laws or else the CRA will deny them expense deductions.
In 2023’s fall economic statement, the Liberal government proposed denying income tax deductions for expenses such as repairs and property taxes when short-term rentals are non-compliant with provincial or municipal regulations and licensing. The changes arose amid the proliferation of platforms such as Airbnb and the housing crisis.
While the new rules were effective at the beginning of 2024, transitional relief is available so that if a taxpayer was compliant by Dec. 31, 2024, the taxpayer is deemed compliant for all of 2024.
The transitional relief applies to “persons (including corporations) and partnerships for the 2024 tax year,” the CRA’s release said.
A residential property that is rented (or offered for rent) for a period of less than 90 consecutive days is considered a short-term rental. The property could be part of a house, apartment, condo, trailer or houseboat, among other dwellings.
When a residential property is non-compliant with provincial and municipal laws, denied expense deductions are calculated by multiplying expenses incurred during the year by the proportion of days in the tax year that the property is non-compliant. The CRA provided a client example in the release on Wednesday.
The agency also reminded taxpayers that they must maintain accurate books and records to report rental income and to claim eligible expenses, including documentation that the property complied with provincial and municipal registration, licensing and permit requirements.
“The CRA may conduct audits or reviews to verify the accuracy of the income and deductions reported by taxpayers on their returns to ensure the deductions are permitted under the new rules,” the release said.
The CRA further directed people to submit a lead to the agency if they suspect someone in Canada to be cheating on taxes.
The federal government has said there are an estimated 235,000 short-term rentals across Canada.
In the 2023 fall economic statement, the feds committed $50 million over three years, beginning in 2024–25, for a short-term rental enforcement fund to help municipalities enforce their restrictions on short-term rentals. Applications for grants from the fund can be submitted until Friday.
Last year, the Parliamentary Budget Officer estimated the new rules for expense deductions would raise an additional $10 million in income taxes in 2023–24, $39 million in 2024–25, $40 million a year in both 2025–26 and 2026–27, and $41 million in 2027–2028. That totals $170 million over the five years.