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Rental income has generated a great deal of income over the years and has opened a variety of rental locations across the globe. Rentals can also be a great investment for owners when managed properly. Selecting properties and efficiently overseeing them can reliably generate a steady return on investment without the unpredictability of the stock market. However, the success of the investment hinges on both your management abilities and the condition of the rental market annually.
Ready to jump into something new but want to understand your income tax reporting obligations as a host or co-host with the Canada Revenue Agency (CRA)? The CRA considers income earned from short-term and mid-term rentals (STR/MTR) as taxable income. This means you must report your income earned through hosting platforms on your personal tax return and pay taxes on the profits generated.
The tax implications on your rental property
The tax implications differ based on the owner of the rental property. Generally, rental property ownership can occur through three primary methods:
1. Personally
2. Through a partnership(s)
3. Within a trust/cooperation
Personally
Your rental property is a sole proprietorship if you own and personally manage it. In this instance the property will be taxed personally. As a result, the amount you will be required to pay will depend on the tax bracket that applies to your earnings. Learn more here.
Partnership
If you buy a rental property in Canada with a family member or friend(s), the CRA considers you all co-owners, forming a partnership. Unlike a sole proprietorship, a partnership does not file a tax return. Typically, rental income is divided among partners based on the agreed-upon ratio. Each partner includes their share of income on their personal tax return.
A Trust / Cooperation
When the rental property is owned by a corporation, several factors need consideration to determine the rental income tax rate in Canada. Unlike personal or partnership ownership, a corporation is its own legal entity. Rent is paid to the corporation, which is then accountable for taxes.
The combined federal and provincial corporate tax rates range from 23% to 31% depending on which province the corporation resides in. However, in most cases, the rental income would be considered passive and subject to a higher rate of 46.67% to 54.67% depending on the province.
Note that similar rules but different tax rates apply to a trust.
Should you charge GST/HST as a host/co-host?
Another important aspect of income earned through hosting platforms in Canada is the Goods and Services Tax (GST) or Harmonized Sales Tax (HST). GST/HST applies to short-term housing rentals for periods less than 30 consecutive days while long-term residential rentals are exempt from GST/HST. If your total annual revenue from your Airbnb activities exceeds $30,000 in a 12-month period, you are required to register for and collect GST/HST from your guests.
Even if you don’t meet the $30,000 threshold in a 12-month period, it is still beneficial to register for GST/HST voluntarily.
In Toronto, for short-term rentals of less than 28 days, there is a requirement to pay short-term rental municipal accommodation tax. The collection and remittance are the responsibility of the host/co-host.
Minimizing your tax liability
While it is important to meet your tax obligations as a host, there are strategies you can employ to minimize your tax liability. Here are some tips to consider:
Take advantage of deductions: Familiarize yourself with the eligible deductions and ensure you claim all applicable expenses to reduce your taxable income.
Consider incorporation: Explore the option of incorporating and operating your hosting as a business rather than simply earning passive income. This way, you may be eligible to take advantage of Canada’s lower small business rate and access other tax benefits. Having said that, if you are thinking of incorporating, it’s imperative to ensure that your income earned through hosting platforms complies with local regulations. This typically entails obtaining the necessary permits and licenses and ensuring that your vacation rental meets the appropriate compliance rules and zoning requirements.
Record-keeping and documentation requirements
As a host, you are required to maintain proper records and documentation to support your income and expense claims. The CRA may request these records in case of an audit or review, so it is essential to keep them organized and accessible.
By keeping accurate records and documentation, you can easily substantiate your income and expenses, ensuring compliance with CRA’s requirements.
Concluding thoughts
Understanding and complying with STR/MTR income tax regulations in Canada is crucial for hosts to avoid penalties and unnecessary tax burdens. By properly reporting your income, documenting your expenses, and seeking professional advice when needed, you can navigate the world of STR/MTR income tax in Canada with confidence. So, enjoy the benefits of being a host while fulfilling your tax obligations responsibly.
Making a living off rental properties has become more common now for many Canadians who want to supplement their retirement benefits. However, it requires various considerations to ensure a proper structure is in place to suit individual goals. The ownership model for a rental property depends upon the individual situation. There is no fit for all approach.
Personal rental income that you earn is taxed in accordance with your marginal tax rate, but it does not include your provincial income tax. In most cases, the taxes may go up to 53% of the earnings, which is why it is always advisable to consult a chartered professional accountant like the experts at Zeifmans LLP who can help you reduce your tax liability.
If you’d like more information, please do not hesitate to reach out to our team at info@zeifmans.ca or download our firm brochure here.
