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, which is one of Negatives of Airbnb Rental Property.
HST taxes on Airbnb Rental Income
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.
What this essentially means is that you have to charge HST taxes if you rent out your Airbnb (short-term rental property), for anything less than 30 days.
Is there an exemption?
- Small supplier exemption
There’s a small supplier exemption available if your revenue from your short-term rental (and all other income from any other commercial activity you may have on an associated basis) is less than $30,000 in a 12 month period. Basically, no tax is collected on taxable supplies of the small supplier division.
Let me use an example to explain…
If you are an Airbnb host for a number of properties, you are only eligible for one $30,000 small supplier exemption.
So, if you make $25K from your first Airbnb, and $20K rental revenue from your second one, you would have exceeded the threshold when the combined revenue exceeds $30,000.
Nowadays, CRA requires these hosting platforms (like Airbnb) to charge HST taxes even if you are not HST registered.
But, being a HST registrant is NOT a bad thing, in some cases, you may even want to register early, i.e. register before your revenue hits $30,000.
If you’re buying a newly constructed home for Airbnb purposes, consider volunteering to register for HST before waiting for the short-term rental income to exceed $30K. The reason being that you can purchase a new home without paying for HST if you are using it to earn income from commercial activities. This also means that you will have to charge HST even if your revenue is below $30K.
Therefore, typically, real estate investors opt for the hassle of charging taxes (HST) on their Airbnb (short-term rentals).
- Long-term residential rentals
If your short-term rental (such as Airbnb) hosts the same guests for more than 30 days consecutively, you are not required to charge HST on that stay.
What if you decide to stop Airbnb hosting and switch it to a long-term rental or personal use property?
Well, if you decide to get out of the short-term rental market, and turn your property to long-term residential rental or personal use home after operating your property as short-term rental… you’re now considered to convert a commercial used property to a residential used property in the eyes of the CRA.
When you do the conversion, you’re required to self assess the HST on the fair market value of the property, and remit the HST to CRA.
Ouch! That can be a substantial amount of money when HST is calculated on the fair market value of the property when you change its use.
What does that really mean? Negatives of Airbnb Rental Property
Say you purchase a residential resale property for $500,000, you didn’t pay any HST on the purchase. You decide to use this property for Airbnb purposes to generate revenue for a couple of years. COVID hits and you’re forced to pivot and convert the property to a long-term rental instead.
At the time of the switch, the property was worth $600K.
You would now be required to do a self-assessment, remit HST on $600K to CRA as you’re converting a commercial property to residential use.
13% of $600K is $78K.
You’re eligible to claim HST you paid on acquiring the property but because it was a residential resale home, you didn’t pay HST on the purchase.
You would have to remit most of the $78K to CRA. Yikes!
HST taxes on selling your Airbnb rental
When you sell your Airbnb property, you would have to charge HST taxes on the sale of the property.
This is very common for properties that are primarily used as short-term rentals, such as condo units located around various resorts.
As an example, our client purchased a small hotel unit. Sellers charged HST taxes on the sale as this unit was previously used for Airbnb short-term rentals in the past.
Depending on the type of the properties you are operating your short-term rentals out of, most residential resale buyers would not want to pay HST on top of the purchase price, especially since their intended use would not be short-term rental. You may have to include HST in the sale price in these circumstances.
Again, similar to the example I used earlier…
Say you purchased a residential home for $500K, and used it for short-term rental.
You then sell it for $600K.
The $600K would have included the HST and you’re liable to do a self-assessment to CRA.
Contact Abdullah CPA for further guidance on Tax Negatives of Airbnb Rental Property
