Sites like Airbnb, HomeAway, FlipKey and VRBO offer homeowners (and renters!) a flexible way to monetize their space through a process known as accommodation sharing. In fact, Airbnb makes it easier than ever for Canadians to rent out an extra room in their home. Some people even maintain full-time vacation rental properties to make extra cash.
Listing your space on Airbnb or any other accommodation sharing platform can be a controversial way to make money. In many areas, vacation rentals have disrupted local hotel industries and inflated rents. People affected by these consequences tend to harbour a negative view of accommodation sharing. This is especially true when landlords opt to rent their units on a short-term basis to tourists, while local residents are struggling to secure stable, affordable housing.
This article is in no way meant to encourage people to take properties off the rental market and turn them into makeshift hotels. That being said, if you are already using or planning to use Airbnb to find roommates or subletters and make a bit of extra cash, this article will help you understand the tax implications of doing so.
Do you have to pay tax on Airbnb income in Canada?
If you made any money at all on Airbnb last year, chances are you will have to pay taxes on those earnings. All Canadians must report every penny they earn to the CRA. This includes amounts from accommodation sharing.
In Canada, most Airbnb income qualifies as rental income. Rental income is any money you earn from renting out property that you own or use. The good thing about Airbnb is that the site keeps track of your earnings so you can see your total rental income for the year. To access this information, consult the Transaction History in your account.
You can deduct any reasonable rental expenses you incurred to earn rental income. Make sure to keep a detailed record of any expenses you incur to earn rental income, as the CRA will want to see them in the event of an audit.
The expenses you can claim will vary depending on whether you are renting out your entire home or only part of it. You can only claim outlays related to the share of your home that you are renting out, for the nights the room was rented.
This means that if you rent out a single room in your home, you will only be able to deduct the share of your expenses that corresponds to the size of that room. For example, if you rent out a room that is 25% of the size of your home, you will be able to deduct 25% of your rent and utilities as an expense.
Similarly, if your vacation unit was occupied 80 nights out of the year, you will only be able to claim 22% of your annual expenses. To figure out your annual occupancy rate percentage, divide the number of nights your listing was booked by the number of days in the year.
Do you need to charge GST/HST as an Airbnb host?
If you rent your home on a short-term basis, you will need to start collecting and remitting provincial sales taxes to the CRA once you earn more than $30K over four consecutive calendar quarters. Short-term rentals are defined as guests who stay in your home for less than a month at a time. If you rent your home on a long-term basis, the income you earn is not subject to Canadian sales tax.
Self-employed Canadians and business owners should note that if they are already GST/HST registrants, they must charge sales tax on vacation rentals regardless of their income. Unfortunately, the Airbnb platform doesn't currently allow Canadian hosts to add sales taxes to their listings.
Some hosts bill their guests for sales taxes when the guests arrive. Since this can be awkward, Airbnb recommends including the cost of any taxes you will have to pay in your nightly price. You can always add a note on your listing explaining that your price includes local sales tax. This may help justify a higher nightly rate.
When the time comes to submit your sales tax forms, you can take the total amount you made on Airbnb last year (A) and use an online calculator to find your subtotal before taxes (B). Subtract B from A and you'll know how much money you owe for GST/HST.
For instance, let's say you made $4K last year on your Airbnb in Toronto, and you realize you need to remit HST on that amount because you already collect sales taxes for your small business. The HST rate in Ontario is 13%. Thirteen percent of $4K is $460.18. This means your true Airbnb subtotal was $3,539.82 for the year.
If this all seems like a pain, remember that as a GST/HST registrant, you can claim input tax credits for any reasonable expenses you incurred.
How much tax will I have to pay on Airbnb income?
As mentioned earlier, most income earned through accommodation sharing is considered rental income by the CRA. Personal rental income is taxed in accordance with your marginal tax rate. In 2019, the federal tax rate for the first $47,630 of income is 15%. And that doesn't include provincial income tax. In fact, most Airbnb hosts who report their income as rental income should set aside 30% of their earnings if they want to be able to pay their taxes without having to scramble to make their payments on time.
So is there any way to reduce your taxes on Airbnb income further?
Depending on the laws where you live, you might be able to benefit from Canada's lower, small business tax rate if you incorporate and treat your Airbnb as a business rather than a way to collect passive income. In fact, the CRA considers that income earned from accommodation sharing as business income if you offer additional services such as cleaning, meals, or airport pick-up services.
Many hosts offer these services anyway because they are a great way to ensure great reviews and repeat guests. That being said, if you are thinking of incorporating to save on taxes, you will need to make sure your Airbnb complies with local laws. Compliance usually involves applying for permits and licences and making sure your vacation rental is zoned accordingly.
For most people, this isn't possible, especially considering how much Canadian cities are cracking down on illegal vacation rentals. If you are only planning on renting out your home part of the year, incorporating may also be more trouble than it's worth. Luckily, you can also reduce your income taxes by claiming eligible business expenses.
What tax deductions can Airbnb hosts claim in Canada?
Whether your Airbnb income falls under the umbrella of rental income or business income, you'll want to deduct as many eligible expenses as you can to reduce your income taxes. Here are a few examples of expenses you can claim for your vacation rental:
Your rent or mortgage interest
Cleaning supplies or fees associated with a cleaning service
The cost of new towels and guest linens
Any minor renovations or improvements to the guest area (i.e., adding a fresh coat of paint to the room)
The cost of breakfast items and snacks for guests
The cost of soap, shampoo, and other toiletries
Fees you might pay to store your valuables, whether you decide to rent a storage locker or install a lock on a cabinet
The cost of installing a lockbox or keypad so guests can check themselves in
The cost of making new keys
Your electricity and internet bill
Home insurance
Interest and bank charges incurred to buy or improve your rental property
Any management or administration fees you might pay to have your listing managed by a third party
Property taxes if you own your home (only for the period your property was available for rent)
The cost of travelling to and from your rental property to collect rent, check on guests, get the place ready, etc. (Pro-tip: use an app like MileIQ to track your mileage!)
Categorizing expenses
Airbnb hosts should note that these expenses are all considered current expenses, which don't provide a lasting benefit. If you buy a home just to put it on an accommodation sharing site, for instance, that would be a capital expense. You can deduct part of your mortgage interest, but any amounts going towards your mortgage principal are not tax deductible.
If you take on a major renovation project to improve your vacation rental (i.e., renovating an entire kitchen or bathroom), you will need to claim that expense as a Capital Cost Allowance deduction.
Not sure whether an expense is a capital expense or a current expense? Think about whether the expense is likely to reoccur in a relatively short period. If you have to re-invest in the same item or service anytime in the next year, that expense should be considered a current expense and you will be able to claim it on your income tax return.
Remember that if you only rent your space out part of the year, you will need to base your expense deductions on a percentage, as outlined earlier in this article. If you invest in something that is likely to benefit both you and your guests (i.e., a new coffeemaker that you will be using too), the same formula applies, as you will only be able to deduct part of that expense.
Airbnb hosting: Fun or work?
Most people use Airbnb to supplement their income and improve cash flow, especially if they live in a hot rental market or "touristy area." While renting your home on Airbnb can be fun, empowering, and creative, it's also a lot of work. Like most businesses, listing your space on Airbnb may also require a bit of start-up capital. Namely, you might have to invest in furniture, bedding, and other amenities. Some hosts even go so far as hiring designers and professional photographers to make their spaces more attractive to potential guests. Keeping detailed records of your expenses will help you back up your claims.
