Sun, Snow and the CRA: Taxes & Regulations for Vacation Rental Owners

Welcome to the wild world of vacation rentals, also known as short-term rentals (STRs), where you can turn your spare property into an income-generating machine almost overnight.

While hosting a vacation rental may seem like an easy way to bolster your passive income, when it comes to taxes and regulations, there are a few things that could cast a shadow over your fun in the sun. Let’s dive into some of the tax and regulatory considerations for vacation rental owners.

Short-term Rental Regulations

Municipalities across B.C. have been introducing more rigorous standards regarding vacation rentals to ensure hosts comply with local laws and regulations. The City of Vancouver recently implemented new measures, including a requirement for property owners who want to rent their unit(s) for fewer than 30 days at a time to have a short-term rental business license. This business license must be included in all listings and advertisements, and license holders need to comply with zoning regulations and safety standards (e.g. installing fire alarms and emergency exit access). Similar rules have been introduced in other B.C. municipalities, so ensure you research your city’s regulations to see what conditions apply.

Another consideration around operating a vacation rental is the nature of the property’s strata regulations. Strata corporations can find themselves on the hook for damages when a unit is being used as a pseudo-hotel without the corporation’s knowledge, therefore some strata councils are imposing bylaws on STRs or banning them outright. In B.C., strata corporations can impose a fine up to $1,000 a day for owners or residents not complying with STR bylaws. Check your building’s current policies on STRs before moving forward with your vacation rental listing process as strict fines and penalties could apply to those who break them.

Vacation Rental Income and Deductible Expenses

You’ve done your due diligence, secured your license, verified your property can be used as a short-term rental and are ready to start operating. What’s next?

First off, you should know that the income generated from vacation rentals is taxable and must be reported on your tax return. You may be able to deduct certain operating expenses from the rental income; however, you can only claim certain eligible expenses for the time your property was generating revenue, and only for the percentage of property space being rented out. Therefore, it’s essential that you keep detailed records of when your property was used for personal use and when it was rented out, as well as which amenities and areas of the property that were used for each rental period.

Common deductible expenses include:

• Advertising and marketing costs
• Insurance
• Property taxes
• Municipal (e.g., City of Vancouver) short-term rental licensing fees
• Accounting and legal fees
• Mortgage interest (not your mortgage payments)
• Repairs, cleaning, maintenance, new locks and keys
• Management and administration fees
• Utilities (e.g., gas, electricity, water, cable and internet)
• Supplies (e.g., bed sheets, toiletries and extra kitchen items)

Tax Considerations for Vacation Rental

This is where things can get complicated in your journey to becoming a vacation rental host. Individuals who operate short-term rentals in B.C. will need to charge or pay the following taxes:

GST

If your gross STR income exceeds $30,000 in a 12-month period, you must charge 5% GST on the listing price of your rental, including any cleaning fees, for bookings that are 30 nights or shorter. If STR income is below the $30,000 threshold, or if a guest stays longer than 30 nights, you generally will not need to charge 5% GST.[1]

PST

All STRs in B.C. must charge 8% PST on the listing price, including any cleaning fees and guest fees, for bookings of 26 nights or fewer. This 8% PST is designed to level the playing field between hotels and STRs.

For all other goods and services, 7% PST must be charged.

Municipal and Regional District Tax (MRDT)

All STRs in B.C. must charge a 2–3% Municipal and Regional District Tax on the listing price, including any cleaning fees and guest fees, for bookings of 26 nights or fewer. This tax rate varies depending on local laws and is calculated based on a flat rate or percentage rate, the number of guests, number of nights booked and property type. MDRT exemptions may apply to STRs that are not listed online, have gross revenue under a certain threshold and charge under a certain rate per night, amongst other conditions. Visit the Government of B.C. website section on PST and MRDT on Accommodation for information on how MRDT would be applied in your area.

Registration with CRA

Vacation rental platforms (e.g. Airbnb, Vrbo) that operate in Canada are registered with the CRA and will have a tax registration number, which you can provide to guests for their purposes of claiming a GST tax credit if they are eligible. If you have a vacation rental listing and aren’t registered for GST and PST (based on how you rent your property), you aren’t obligated to collect and remit taxes yourself—federal law requires the vacation rental platform to collect and remit taxes on your behalf.

If you are registered for GST and PST, it will be your obligation to account for these taxes on your accommodation. In this case, you’ll need to provide your business number to your vacation rental platform so they won’t collect and remit these taxes on top of your listing price.

Vacation Rental Operation and Property Sales

One other major factor that you must consider before turning your property into a vacation rental is the impact it can have on any residential exemptions that apply to the property. Once the property is income producing, you’re effectively transitioning it from personal to business use. This means you may not be eligible to claim the principal residence exemption when the property is sold, and doing so may trigger a deemed disposition due to a change in use of the property.

In these situations you may have to pay income tax on the capital gain realized from the sale or deemed disposition of the property—which can be quite a hefty sum—so be sure to know your options before proceeding with transitioning your property.

At this point, the world of vacation rentals might seem a bit more complex than you originally thought. However, don’t let that discourage you from pursuing the goal of turning your property into a great source of additional income. Platforms like Airbnb offer resources for hosts that can help you track income and expenses, as well as generate tax reports. But for expert guidance, reach out to your DMCL advisor and they’ll provide you with all the knowledge and tools you need to get started on your vacation rental adventure.

Article written by Premila Sharma

[1] Further requirements can apply regarding meeting the $30,000 threshold, so be sure to reach out to your DMCL advisor for more information on this measure.