Introduction: Landlord's Tax Obligations
Canada has, over the years, gradually become a difficult business for landlords. In particular, Canada has grown much less welcoming towards short-term rental units. In fact, the government of Canada has specifically targeted landlords who operate short-term rentals and imposed a series of additional taxes and restrictions on short-term rental units. For example, a traditional landlord, who rents out units on a long-term basis, can report rental income and claim rental expenses. The landlord does not need to collect GST/HST from his or her tenants, if the units are rented on a long-term basis, regardless how much rent the landlord collects in a year. Short-term rental property owners, however, are now required to collect and remit GST/HST, if a property owner does not qualify as a small supplier.
Furthermore, effective January 1, 2024, a short-term rental property owner will not be able to deduct rental expenses if the owner is non-compliant with any of the registration, licensing, and permit requirements in the locality where the property is located, or if the property is located in a province or city that does not permit the operation of a short-term rental. Short-term rental property owners may also be subject to additional provincial or municipal taxes (e.g., Ottawa has a 5% Municipal Accommodation Tax on all short-term rental units). If a short-term rental property owner switches to become a traditional long-term landlord, the property owner must pay GST/HST on the fair market value of the property at the time the property first gets rented as a long-term rental unit.
To help rental property owners better understand their tax obligations, this series provides a basic guide for Canadian property owners who are subject to various types of taxes. This is Part III of the series, which focuses on applicable taxes for short-term and long-term rentals and the landlords' general reporting obligations.
Long-term Rental Units: A Traditional Landlord's Tax Obligations
Traditionally, a landlord enters into a lease with one or more tenants, who are looking to stay for an extended period of time. The lease usually has an initial term that lasts longer than six months. Once the initial lease term ends, unless the tenant chooses to leave, the lease often gets automatically extended on a monthly basis. If a tenant chooses to terminate the lease, the tenant likely needs to notify the landlord ahead of time and fulfill other requirements stipulated in the lease agreement or in accordance with provincial legislation.
For property owners renting out units on a long-term basis, the tax landscape remains relatively straightforward. The rental income earned from these properties is generally reported on the landlord's income tax return of the year, T1 for an individual or T2 for a Corporation. The landlord can also deduct rental expenses related to the rental property, including but not limited to mortgage interest, property taxes, maintenance costs, insurance, and utilities. These deductions reduce the taxable rental income, which in turn lowers the landlord's overall tax liability.
Importantly, GST/HST does not apply to long-term residential rentals in Canada. This means that landlords are not required to charge or remit GST/HST on the rent collected from tenants. However, the trade-off is that landlords cannot claim Input Tax Credits (ITCs) for GST/HST paid on expenses related to the long-term rental property.
Short-Term Rental Units: Layers of Rules and Restrictions from the Municipality, the Province, and the Federal Government
Following the 2023 Fall Economic Statement, the taxation of short-term rentals in Canada has become even more complex. The change in policy reflects the government's intent to regulate this sector more stringently, as the short-term rental industry allegedly worsens the national housing crisis, especially in major cities. Different localities may have different definitions for short-term rentals. In Toronto, a short-term rental is all or part of a dwelling unit rented out for less than 28 consecutive days in exchange for payment. Ottawa and Vancouver set the limit at less than 30 consecutive days. But in general, rentals that are rented out to one tenant for at least 31 consecutive days will not be considered short-term rentals.
Income from short-term rental units is subject to GST/HST. Short-term rental unit owners must become a GST/HST registrant, unless they qualify as small suppliers, collect GST/HST from their tenants, and remit the GST/HST to the Canada Revenue Agency (CRA). If a short-term rental unit owner's gross rental revenue from short-term rental units (and any other taxable supplies) does not exceed $30,000 in the last four consecutive calendar quarter, or in any single calendar quarter, a short-term rental unit owner is not required to but may voluntarily register for GST/HST purposes. This obligation to collect GST/HST introduces additional administrative responsibilities. Property owners need to ensure they are correctly registered for GST/HST purposes and that they comply with all reporting and remittance deadlines. Failure to do so can lead to penalties and interest charges, not to mention the potential denial of rental deductions.
Short-term rental owners who fail to comply with local registration, licensing, and permit requirements will also lose the ability to deduct rental expenses on their income tax returns. This change underscores the importance of ensuring full compliance with all relevant local regulations. For example, Toronto's short-term rental regulations require that such rentals occur only in the property owner's principal residence, meaning secondary or investment properties cannot be legally rented out on a short-term basis. Hosts can rent their entire home for up to 180 nights per year but there is no such limit on hosts who are renting out individual rooms. All operators must register with the city of Toronto, obtain a Short-Term Rental Operator's license, and comply with zoning bylaws that restrict short-term rentals to residentially zoned areas.
In addition to federal GST/HST obligations, short-term rental property owners may also face provincial or municipal taxes. For example, cities like Ottawa and Toronto impose a Municipal Accommodation Tax (MAT) on short-term rental accommodations. The MAT must be collected from tenants and remitted to the municipality, adding another layer of complexity to tax compliance for short-term rental operators.
The New Change-in-use Rules
Under section 45(1) of the Income Tax Act, a property is deemed sold at its fair market value (FMV) when its use changes from personal to commercial or vice versa, triggering a potential capital gains tax. If a homeowner rents out his or her former residence, the homeowner can claim the Principal Residence Exemption to avoid immediate tax. However, if the homeowner later resume living in the property, another change of use occurs, potentially leading to taxable gains without actual sale proceeds.
This change-in-use rule has now extended to apply to rental units that switched from short-term to long-term rental. This means that Canadian short-term rental unit owners face significant financial hurdles if they switch to long-term rentals due to a new tax rule, which requires them to pay applicable GST/HST calculated based on the property's value. This tax, triggered when a property shifts from short-term to long-term use, is intended to treat the conversion as if the property were newly built for tax purposes. While this tax aims to prevent revenue leakage, it could deter efforts to convert short-term rentals into long-term units, despite government encouragement to address housing shortages. Many have expressed concerns over compliance and potential tax audits. The new change-in-use rule, though not designed specifically to hinder rental conversions, adds complexity and financial burden to owners considering long-term rentals. This has led to calls for more supportive policies to facilitate the transition from short-term to long-term rentals, especially in regions facing severe housing shortages.
Pro Tax Tips – Beware of Your Obligations As A Short-Term Rental Unit Owner
If you have been renting out your property on a short-term basis, you should become aware of the additional obligations and tax liability for your 2024 tax year. You may be required to become registered with or to be licensed by your city, in order to legally operate a short-term rental unit. Short-term rental income is now subject to GST/HST, requiring you, as a short-term rental unit owner, to register, collect, and remit applicable GST/HST. Failure to collect and to remit GST/HST may result in penalties and interests. Starting from January 1, 2024, failure to meet local registration and licensing requirements will prevent you from deducting rental expenses. Additionally, depending on where your property is located, there may be additional provincial and municipal taxes, such as the Municipal Accommodation Tax in cities like Ottawa and Toronto.
If you are unsure about whether you have been compliant with all the reporting and tax obligations as a short-term rental landlord, you should engage with one of our expert Canadian tax lawyers. Our expert tax lawyers can provide legal advice and assist you with understanding your tax and reporting obligations, to prevent CRA's penalties and interest in relation to your property.
FAQ
How Does A Short-Term Rental Unit Owner Learn About What His Or Her Tax Obligations Are?
Unfortunately, the learning process is not straightforward, and a short-term rental unit owner likely needs to update their knowledge continuously. Tax policies can change quite quickly and are usually published on the official Canada Revenue Agency website. News articles in relation to short-term rental units can also be a good source of information. If you have multiple short-term rental properties, we highly recommend that you retain one of our Canadian tax lawyers to obtain legal advice specific to your case.
How Does A Short-Term Landlord Become A GST/HST Registrant, Collect GST/HST, And Remit GST/HST?
When an individual landlord registers a GST/HST account, the easiest way is to complete the registration online. Before registration, you should determine the effective date of registration, fiscal year for GST/HST, and your estimated annual rental income. During the registration, you will need to provide your social insurance number, your date of birth, your full name, and your address. You can also have different GST/HST accounts for different properties. However, do keep in mind that each GST/HST account will require you to file separate returns.
GST/HST should be collected when you collect payments from your tenants. Once GST/HST has been collected, you should remit them to the CRA by applicable deadlines. You maybe required to remit the GST/HST collected on an annual, quarterly, or monthly basis, depending on your annual revenue. You can make such payments online, via your bank, or send your payment via mail.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.