The Canadian Federal government and some provincial governments are clamping down on short-term rentals to curb the long-term housing challenges in Canada. One of the measures being set in place is denying short-term rental property expenses that would have otherwise been tax deductible for long-term rental properties.
The Canadian government’s Housing Action Plan, as shown in the 2023 Fall Economic Statement, suggests that short-term rental investments for income purposes are one of the reasons for the housing shortage problems many Canadians face. Landlords and property owners take advantage of the high-demand housing market for visitors and temporary residents.
Sometimes, property owners are able to make higher incomes from short rentals than from long-term rentals. This incentivizes real estate investors to shift to short-term rental opportunities like Airbnb and Vrbo.
Short-term rental expenses not classified as tax-deductible
Generally, real estate investors and businesses can deduct allowable current and capital expenses incurred in the tax year. Some of these expenses include insurance costs, mortgage interests, advertising, general management and administration fees, property taxes, utilities, repairs, salary and wages.
The property expenses incurred reduce the taxable rental and property income investors report for tax purposes, thus resulting in lower taxes. However, with the new intention to disallow short-term rental expenses as eligible tax deductions, real estate investors and landlords will be forced to pay more taxes on higher net rental income. The Canadian government is showing full support to provinces such as Ontario, British Columbia, and Quebec, implementing rules that regulate how short-term rentals operate.
British Columbia rules for short-term rentals
B.C.’s Short-Term Rental Accommodations Act is legislation helping the province’s local governments enforce their short-term rental bylaws to restrict short-term rental operations and improve the long-term rental market. The Act intends to solve the housing crises the province faces, as over 16,000 homes are being used for short-term rental in a year in the province.
The Act applies to the following types of short-term rentals:
- Offers hosted by platforms like Airbnb, VRBO, Expedia, and FlipKey that allow the public to reserve and pay for rental services.
- Web listing rental forums, such as Facebook Marketplace, Kijiji, and Craigslist, and
- Newspapers classified rental listing ads.
The Act does not apply to reserve lands, hotels, motels, RVs, tents, temporary shelters, and Nisga’a Lands or the Treaty Lands of a Treaty First Nation (unless the Nation chooses to opt into all or part of the legislation through a coordination agreement with the Province).
Regional districts now have new business licensing authority to regulate and licence short-term rentals and other businesses similar to municipalities. Starting on May 1, 2024, if a B.C. local government requires a short-term rental business license, the short-term rental hosts are required to display a valid business license number on their listing. If this requirement is not met, the short-term rental platform is required to remove the listing at the local government’s request.
Additionally, starting on May 1, 2024, the Province will implement a principal residence requirement limiting short-term rentals to principal residences, secondary suites or accessory dwelling units. Some exemptions may apply.
In a bid to enforce the Short-term Rental Act, the maximum fine that regional districts can set for prosecutions of bylaw offences under the Offence Act has increased from $2,000 to $50,000. Likewise, the maximum municipal ticketing fine that a local government may set under the Community Charter Bylaw Enforcement Ticket Regulation and Vancouver Charter By-Law Enforcement Ticket Regulation has increased from $1,000 to $3,000 per infraction per day. The increased fines were effective October 26, 2023 (with Royal Assent), and other timelines are expected to follow in 2024 and 2025.
Accordingly, the Province will introduce a short-term rental registry to ensure compliance with short-term rental regulations, as hosts will be required to use a provincial registration number on listings, and rental platforms must validate registration numbers using the information on the Province’s registry.
What next on short-term rentals?
As the federal government supports provinces and municipalities enacting new regulations to prohibit short-term rentals by denying short-term rental income tax deductions on or after January 1, 2024, rental business owners need to strategize on areas to clamp down on business costs or take a shift towards longer-term rentals.
To determine how these new regulations can impact your bottom line and tax deductions, contact DW & Associates Chartered Professional Accountants.
