Airbnb Properties – Tax Implications

Implications of Recent Tax Ruling for Airbnb property (Short-Term Rental) Owners.

Court rules against Ontario short-term rental owner in tax case.

Canadian homeowners might want to think twice before listing their properties on Airbnb as they might have to pay a 13% tax (HST) on the property if they sell it.

The Tax Court of Canada’s recent ruling has significant implications for Canadian property owners who use their residences for short-term rentals, particularly when they decide to sell the property. According to the decision, properties that have been primarily used for short-term rentals on platforms like Airbnb may be subject to Goods and Services Tax (GST) or Harmonized Sales Tax (HST) upon sale. Typically, the sale of a personal residence in Canada is exempt from HST. However, the court found that the frequent, short-term rental usage turned the property into a “commercial” asset, rather than a “residential complex” eligible for exemption.

The court case involved a condo owner who initially rented his property on a long-term basis but switched to short-term rentals through Airbnb in 2017. He made $11,200 in 2017 and $43,179 in 2018 through the short-term rental. When he sold the condo in 2018, the Canada Revenue Agency (CRA) assessed a 13% HST on the sale, amounting to over $77,000. The court determined that, due to its primary use as a short-term rental, the property was no longer considered a residential unit but instead aligned with commercial properties like hotels or motels. As such, it did not qualify for a residential tax exemption under Canada’s GST legislation.

The ruling serves as a warning to homeowners using platforms like Airbnb: to avoid potential tax liabilities, they may need to convert properties back to long-term residential use before a sale. However, short-term rental status at the time of sale will likely trigger HST charges. This decision highlights a need for property owners to carefully assess tax implications when altering property usage for short-term rentals.

The Pros and Cons of Running an Airbnb: Is It Right for You?

The idea of renting out a property on Airbnb has become a popular venture for people looking to make extra income. As travelers increasingly prefer unique and localized stays over traditional hotels, Airbnb has positioned itself as a platform with immense earning potential. However, becoming an Airbnb host involves both rewarding and challenging aspects. If you’re considering running an Airbnb, here are some of the key pros and cons to weigh.

Pros of Running an Airbnb

• Potential for High Income – One of the most appealing aspects of Airbnb is the potential for a lucrative income. By renting out a property or even a room in your home, you can generate significant revenue, especially if your property is located in a high-demand area. Some hosts earn enough to cover their mortgage, while others turn their listings into a primary income stream.
• Flexibility -Airbnb allows hosts to control the booking calendar, offering the flexibility to rent out the property only when it suits them. This makes it an excellent option for those who might want to keep the property available for personal use or for those who are only looking to earn extra income part-time.
• Minimal Long-Term Commitment – Unlike traditional rentals with leases, Airbnb offers a short-term rental model that can provide freedom from long-term commitments. If circumstances change or if hosting doesn’t work out, you can simply stop accepting bookings without major financial or legal repercussions.
• Meeting New People and Cultural Exchange – For some, one of the best parts of hosting on Airbnb is the chance to meet travelers from all over the world. It can be a rewarding experience to connect with people from diverse backgrounds and share local knowledge. Many hosts enjoy the hospitality aspect of Airbnb and see it as a way to offer an authentic travel experience.
• Property Security with Regular Check-Ins – When you host guests regularly, you have the opportunity to check on your property frequently. This is beneficial because issues like maintenance problems or property damage can often be identified and addressed more quickly compared to long-term rentals.

Cons of Running an Airbnb

• Time and Effort Required – Hosting on Airbnb isn’t as passive as it may seem. It involves cleaning between guests, communicating with guests before and during their stay, handling guest requests, and maintaining the property to meet Airbnb standards. Some hosts find that it requires more time and energy than they initially expected.
• Seasonal and Market Demand – Income from Airbnb can be unpredictable and heavily influenced by market trends and seasonality. Some areas have a strong off-season where demand drops, which can significantly reduce income. Additionally, in highly competitive markets, hosts may need to invest in amenities or lower rates to attract guests.
• Legal and Regulatory Issues – Many cities and local governments have imposed strict regulations on short-term rentals. Some require costly permits, while others restrict or even ban short-term rentals in certain areas. Violating these regulations can result in fines, and changes in local laws can disrupt or end an Airbnb business unexpectedly.
• Property Wear and Tear – Hosting guests regularly leads to wear and tear on the property. Replacing furniture, repairing appliances, and conducting routine maintenance can add up over time. While this can be offset by earnings, it’s a factor that hosts need to plan for.
• Possible Negative Experiences with Guests – Hosting strangers always carries some risk. Most guests are respectful, but there is always the possibility of encountering challenging situations, such as property damage, noise complaints from neighbours, or violations of house rules. Some hosts also experience cancellations, last-minute requests, or difficult guest interactions, which can be stressful.

Check our other blogs under Real Estate 101 – that might give you answers about buying or selling a home.

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