Living in Canada? Making income from listing an Airbnb property? Here’s all you need to know about taxes and mortgage options for short-time rental property owners.
Recently, Airbnb made it even easier for Canadians to rent out an extra room in their home or maintain a vacation property in full-time rental mode.
However, as lucrative as short-term rental income might be, there are several income taxes and regulations to bear in mind.
Taxes For Airbnb Income In Canada
Canadian citizens must report their entire income to the CRA (Canada Revenue Agency).
If you gained any earnings from Airbnb last year — or any other accommodation sharing system — there’s a pretty strong chance you’ll have to fill out a form, report them as rental income, and pay the legal taxes for them.
Any money earned from renting out property, either owned or used, qualifies as rental income. What’s cool about Airbnb is that the website does a very good job at keeping track of all your earnings, making it way easier to check up on your total rental over the year. Simply click the Transaction History section in your Airbnb account and consult the records yourself.
Reporting Rental Income And Form T776
When it comes to tax returns in Canada, rental income — including from Airbnb — falls under the Statement of Real Estate Rentals section of your Form T776.
In the event of an audit, the CRA will want to verify all expenses incurred to earn rental income, so make sure to keep a detailed record of them. Most reasonable rental expenses can be deducted, depending mainly on whether you are renting out your entire home or only part of it.
Simply put, if you are renting out a single room in your house or flat, you should be able to deduct the share of expenses corresponding to the room’s size. For example, if the room you rent out is roughly 25% of the size of your home, this makes 25% of your rent and utilities deductible as an expense.
In the case of a vacation house or flat being occupied 80 nights out of the year, you will only be able to claim 22% of your annual expenses. To calculate the annual occupancy rate percentage, simply divide the number of nights your listing was booked by the number of days in the year.
GST/HST For Airbnb Hosts
Owners renting their home in Canada on a short-term basis will need to start collecting and submitting provincial sales taxes to the CRA once they’ve passed the $30K earnings cap over four consecutive calendar quarters. Short-term rentals are defined as guests who stay in your property for less than a month at a time.
When renting their home long-term, owners should know their income is not subjected to Canadian sales tax.
Note that if you are self-employed or a business owner and already GST/HST registrant, you will need to charge sales taxes on vacation rentals regardless of your income. Unfortunately, the Airbnb platform doesn’t allow hosts living in Canada to add sales taxes to their listings.
Some hosts choose to bill their guests for sales taxes as soon as they arrive. To avoid inconveniences, Airbnb recommends including any extra taxes in the nightly price. You can explain in your listing that the total price includes local sales tax. That way, your guests will know upfront how much they’re paying.
Set Aside Some Funds For Taxes
When submitting your sales tax forms, you can take the total amount of earnings made on Airbnb last year (A) and, with the help of an online calculator, find your subtotal before tax (B). Subtract B from A to figure out the amount owed for GST/HST.
How Much Tax Does Airbnb Income Generate?
Personal rental income is taxed according to your marginal tax rate. In 2022, the federal tax rate for the first $47,630 of income is 15%, not including provincial tax income. Most Airbnb hosts who report their income as rental income should reserve 30% of their earnings for taxes to avoid scrambling to make the payment before the deadline.
Reducing Your Airbnb Income Tax Further
Depending on local laws, you might qualify for Canada’s lower, small business tax rate if you choose to incorporate and treat your Airbnb listing as a business rather than passive income.
In fact, the CRA defines earning obtained through accommodation sharing as business income, especially if you provide additional services such as meals, cleaning or car pick-up services.
These services will also ensure your listing has good reviews and returning guests. However, the first thing you need to do is ensure your Airbnb complies with local laws, especially when applying for permits, licences and zoning regulations.
If you are only planning to rent out your home for part of the year, incorporating may be a bad investment, effort-wise.
Tax Deductions an Airbnb Host Can Claim In Canada
So we’ve established that your Airbnb earnings are categorized either as rental income or business income. Either way, you’ll want to reduce your income taxes.
Here’s a list of a few expenses you can write off your vacation rental:
- Rent or mortgage interest – Not the mortgage payment itself
- Cleaning services – Supplies as well as other fees
- Towels and linen cost for guests
- Improvements or other minor renovations to the guest are
- Breakfast cost or snacks for guests.
- Toiletries such as soap, shampoo and other hygiene products
- Electricity and internet bill
- New keys and lock
- Advertising and marketing expenses
Current And Capital Expenses
As a host, you should note that all these expenses are considered current expenses, and they do not provide a lasting benefit.
If you are to, for example, buy a home in Canada just to put it on Airbnb, that would count as a capital expense. Part of the mortgage interest can be deducted, but any amounts dedicated to your mortgage principal do not qualify as tax-deductible.
If you plan to undergo a major renovation project on your rental property (like renovating the entire bathroom), this will qualify as a Capital Cost Allowance deduction.
So where’s the line between capital and current expenses? Recurrence is the key. If your expense is likely to reoccur in a relatively short period — like the weekly dry cleaners bill for the linen, for example — you should be able to consider it a current expense and claim it on your income tax return.
However, if you are renting out space for a part of the year, your expense deductions will automatically be based on percentage. The same goes if you will invest in something that will benefit you and your guests — like a new dishwasher that you both will be using — and you will only be able to deduct part of the expense.
Is Accommodation Sharing More Work Than Fun?
Listing out a property on Airbnb can be creative, empowering, and a great networking opportunity. It will also supplement your income and improve a bit of cash flow, especially if located in a tourist area or on a hot rental market.
But that doesn’t mean it’s easy money!
Like any other business, you will need capital before listing your space on the platform. New furniture, bedding, professional photographers to make your property more appealing, are all costs included in your initial investment. Keep a detailed record of all these expenses, and you will have a much easier time backing up your return claims.
Getting a Mortgage For an Airbnb Rental Property
If you are looking to invest in a property to list on Airbnb, and plan to get a mortgage, there are a few things to consider.
Many people think they can use their Airbnb income just like a normal rental income to qualify for a mortgage. But traditional lenders like banks or credit unions are not eager to provide mortgages for properties that will be rented out for short-term stays.
Most traditional lenders shy away from seasonal rentals because they can’t properly assess or rely on the income for your qualification — which may vary seasonally or by location or rely on strong user reviews. Therefore, they see a high risk in getting their money back if you can’t make the mortgage payments.
On top of this, commercial mortgage rates are much higher than residential mortgage rates. Currently, a 5-year fixed rate for a residence is around 3%. A commercial 5-year fixed-rate sits closer to 6.5% (although you may find one at 5.95%).
Most homeowners in Canada with Airbnb rental properties will quickly see their capital eroded by the 300 basis points of difference in interest rates. That’s not even accounting for any other expenses such as property taxes or additional insurance costs incurred when owning investment real estate, as opposed to your home!
Buy Your Airbnb Property With a Private Lender
When planning to get a mortgage for your Airbnb property, you should know that private lenders are not regulated as much as government-backed financial institutions. They may only allow you to purchase a property on a short-term rental plan.
Yes, your mortgage rate might be higher, or the amount of your down payment might have to increase, and there will be less flexibility for payments or payout options. But a reputable mortgage broker who is familiar with loan applications that include short-term rental income declarations can provide you with the best possible rate and unbeatable service.
With just a 25% down payment, I can help you find the right private lender, the best rate, and a flexible mortgage product, including a home equity loan or a second mortgage, among others.
Contact us today, we will take care of all your mortgage needs!
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