Published: January 30, 2025
Starting in 2024, changes to the income tax rules disallow deductions for expenses related to non-compliant short-term rentals. If you rent out your residential property for short periods, these new rules may impact you.
Definition of Terms
Short-Term Rental
A short-term rental refers to a residential property rented or offered for rent for periods of less than 90 consecutive days.
Residential Property
Residential property includes all or part of a house, apartment, condominium unit, cottage, mobile home, trailer, houseboat, or other properties located in Canada that are legally eligible for residential use under local, provincial or municipal laws.
Non-Compliant Short-Term Rental
A short-term rental is deemed non-compliant if:
- It is located in a province or municipality that prohibits short-term rentals at that location, or
- It does not comply with all relevant provincial or municipal registration, licensing, and permit requirements for operating a short-term rental.
Expense Deductions
General Deduction Rules
The Income Tax Act permits taxpayers to deduct reasonable expenses incurred in earning income from property or business. However, for tax years after 2023, deductions for expenses related to non-compliant short-term rentals are disallowed.
Non-Compliant Amount Formula
For tax years after 2023, the deductible expense amount is reduced for any period during which a short-term rental is non-compliant. The reduction is calculated using the formula:
A × B ÷ C
Where:
- A: Total expenses that would otherwise be deductible for the property when used as a short-term rental.
- B: Number of days in the tax year the property was non-compliant.
- C: Total number of days in the tax year the property was a short-term rental.
Transition Relief for 2024
If a short-term rental becomes fully compliant with all applicable registration, licensing, and permit requirements by December 31, 2024, it will be deemed compliant for the entire 2024 tax year. This relief applies only for the 2024 tax year. For example, an individual owns a condominium in a city where short-term rentals of fewer than 30 consecutive days require a license.
Example
- 2025 Activity:
- The unit was rented for 300 nights at $250 per night, generating $75,000 in rental income.
- The owner obtained the required license on July 1, 2025, after operating without one for 181 days.
- Total expenses incurred: $60,000.
To calculate the deductible amount:
- A: $60,000 (total short-term rental expenses)
- B: 181 days (non-compliant rental days)
- C: 365 days (total rental days in 2025)
Non-Compliant Amount:
$60,000 × 181 ÷ 365 = $29,753
Deductible Expenses:
$60,000 – $29,753 = $30,247
Taxable Profit:
$75,000 – $30,247 = $44,753
Had the rental been fully compliant, the deductible expenses would remain $60,000, resulting in a lower taxable profit of $15,000.
2024 Exception
If the property was licensed by December 31, 2024, the full $60,000 in expenses would be deductible for 2024 under the transition relief provision.
Pro Tax Tips – Maintaining Accurate Records
Taxpayers must comply with all local requirements and keep detailed records to:
- Document compliance with provincial and municipal requirements.
- Report rental income accurately and claim eligible deductions.
The Canada Revenue Agency (CRA) may audit or review rental income and expense claims to verify compliance with the new rules. A CRA tax audit can be an overwhelming and potentially expensive experience.
A CRA tax auditor will ask to see books and records and bank account statements, and there may be questionnaires to be filled out. Any information entered incorrectly, even if due to an error, will be used against the taxpayer. Therefore, it is highly recommended that a taxpayer retain an experienced Canadian tax lawyer to navigate the CRA tax audit process.
FAQ
What period for the 2024 transition rule applies regarding short-term rentals?
If a short-term rental became fully compliant with all applicable registration, licensing, and permit requirements by December 31, 2024, it will be deemed compliant for the entire 2024 tax year. This relief applies only for the 2024 tax year.
What records should taxpayers maintain regarding short-term rentals?
Taxpayers must keep detailed records to:
- Document compliance with provincial and municipal requirements.
- Report rental income accurately and claim eligible deductions.
The CRA claims that I had a non-compliant short-term rental, but I disagree. What should I do?
A taxpayer can file a notice of objection within 90 days from the date the notice of assessment or reassessment is issued if he or she intends to dispute the amount.
Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
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