Like other, more traditional, rentals, Canada Revenue Agency (CRA) has specific rules surrounding How Airbnb Rental Income is Taxed in Canada, which you should become familiar with as soon as possible.
HST taxes on Airbnb Rental Income
According to the CRA, Rental income is income you earn from renting a property that you own. You can own the property by yourself or with someone else.
Rental income can be either income from property or business. Income from rental operations, such as short-term rentals and Airbnb, is usually income from the property.
You’ll be considered to have earned rental income when you rent space and provide basic services such as heat, light, parking, and laundry facilities
Therefore, just like all other income you earn, when you earn rental income from renting your property, you need to report the gross rental income and related expenses on your tax return.
On top of the income tax implication, Airbnb (short-term rental) owners are also required to charge HST taxes on the gross rental revenue on behalf of CRA, as short-term rentals are considered a commercial activity.
A short-term rental that is for less than 30 days, such as Airbnb (where the rent charged is more than $20/day), is considered a commercial activity in the eyes of the CRA – Excise Tax Act.
Nowadays, CRA requires these hosting platforms (like Airbnb) to charge HST taxes even if you are not HST registered.
How Airbnb Rental Income is Taxed in Canada
If you own the Airbnb property in your personal name
When you own and operate Airbnb in your personal name, you can report it income as rental income,or self employed income… depending on the extent of service you’re providing.
To clarify this, if you’re operating the short-term rental as a business – providing a lot of services similar to what a hotel would provide – you can choose to report your short-term rental income as self employed income.
Whether you’re reporting your income as rental income or self employed income, the net result is very similar.
The only difference is that if you report your short-term rental income as rental income, the net income you get is not subject to Canada Pension Plan. If you report your short-term rental income as self employed income, you’re liable to pay both employer and employee portion of Canada Pension Plan.
From a financing perspective, you are eligible to borrow money using your self-employed income. But with rental income, the calculation for mortgage qualification can be slightly different. Sometimes, the lenders would only count half of the rental income for your mortgage qualification.
If you own the Airbnb property in a corporation
When you own and operate Airbnb in your corporation (depending on the extent of service that you provide), you may want to report your rental income as active business income. This way you will only pay 12.2% tax in Ontario.
However, you need to provide strong documentation on your situation as to why your short-term rental is providing similar services as a hotel operation would provide.
This can range from providing cleaning services, linen services, internet services, local theme parks passes, sauces and spice, olive oil …anything above and beyond a basic rental to show that you are no longer just a regular rental, but a service based business.
Now, on the other hand, you can always report your rental income as passive income, just like the income from your long-term rental.
The downside of this is that you will be subject to a 50% passive income tax rate inside the corporation, with 30% refundable if you declare a taxable dividend to the shareholder. You do have the option to pay yourself a salary to lower the amount that is subject to the higher rate.
Contact Abdullah CPA for Personalized Advice.
