OTTAWA, ON, Jan. 22, 2025 /CNW/ -
What's new
Changes to the income tax rules now deny income tax deductions related to non-compliant short-term rentals after 2023. If you rented out a residential property for short periods, these changes may affect you.
What is a short-term rental
A short-term rental is a residential property that is rented or offered for rent for a period of less than 90 consecutive days.
What is a residential property
A residential property is all or any part of a house, apartment, condominium unit, cottage, mobile home, trailer, houseboat or other property, located in Canada, which can be used for residential purposes under the applicable laws of the province or municipality where the property is located.
What is a non-compliant short-term rental
A non-compliant short-term rental, is a short-term rental that:
- 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.
Expenses
When calculating a taxpayer's income from a business or property, the Income Tax Act generally permits the taxpayer to deduct reasonable current expenses incurred in the ordinary course of earning that income.
However, when calculating income earned from a short-term rental for a tax year after 2023, the new income tax rules do not allow the deduction of a non-compliant amount.
For more information on deductible expenses, go to Rental expenses you can deduct.
Non-compliant amount
For tax years after 2023, if a short-term rental is non-compliant for any portion of the tax year, the non-compliant amount for that year is determined by multiplying (A) by (B), and then dividing that total by (C).
A x B ÷ C
- (A): the total amount that would otherwise be deductible when calculating income for a residential property when it was used as a short-term rental in the tax year.
- (B): the number of days in the tax year that the property was a non-compliant short-term rental.
- (C) is the number of days in the tax year that the property was a short-term rental.
For additional details, go to T4036 Rental Income.
2024 transition relief exception
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 is deemed compliant for the entire 2024 tax year. This exception only applies to persons (including corporations) and partnerships for the 2024 tax year.
Example:
An individual owns a condominium unit in a city that requires all residential properties that are rented for a period of less than 30 consecutive days to be licensed by the city.
The individual offered the unit for rent for periods of less than 30 consecutive days throughout the 2025 calendar year. The unit was rented for a total of 300 nights at a price of $250 per night in 2025. However, the individual only obtained a short-term rental license for the property from the city on July 1, 2025, after having offered the unit for rent in the first 181 days of the year (January 1 to June 30, 2025). Consequently, the license was effective for the remaining 184 days of the year (July 1 to December 31, 2025). The individual incurred $60,000 in expenses for the property in the 2025 tax year.
To determine the amount that the individual can deduct from their short-term rental revenue, they apply the non-compliant amount formula as outlined below:
Formula: A x B ÷ C
Short-term rental revenue: $75,000 (300 nights x $250/night)
Short-term rental expenses: $60,000
A: Short-term rental expenses for 2025: $60,000
B: Non-compliant days: 181
C: Days the property was available as a short-term rental in the year: 365
Non-compliant amount calculation:
$60,000 x 181 ÷ 365 = $29,753
So, the individual may only deduct $30,247 ($60,000-$29,753) in expenses from the $75,000 of revenue, resulting in a profit of $44,753 for income tax purposes. If the rental had been compliant throughout 2025, the individual would have been able to deduct $60,000 in expenses for the property in the 2025 tax year, resulting in a profit of only $15,000 ($75,000-$60,000).
Note: If this situation had occurred in 2024, the transition relief exception would allow the individual to deduct the full amount of the short-term rental expenses of $60,000, provided the short-term rental was compliant by December 31, 2024. If it was not compliant by that date, the formula used for the 2025 year would also apply for the 2024 year.
Books and records
Taxpayers must maintain accurate books and records to report rental income and to claim eligible expenses. This includes documentation confirming that the residential property was located in a province or municipality that permits the operation of short-term rentals and that the rental of the property complied with all provincial and municipal registration, licensing and permit requirements for operating the short-term rental.
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. For general information on record-keeping requirements, go to: Business records.
Submitting a lead
Maintaining the integrity of the tax system is the responsibility of everyone. It's important to stay on top of your taxes to ensure tax fairness for all Canadians. If you suspect someone in Canada may be tax cheating, you can submit a lead.
Contacts
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Canada Revenue Agency
613-948-8366
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SOURCE Canada Revenue Agency
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