July 2019
Stories of people owning multiple condos and renting them on Airbnb are easy to find. The realities of running a service providing short-term rental accommodation are more complex.
The business of offering short-term rental accommodation is simple to understand. Rent received needs to cover all costs – mortgage, condo fees, property taxes and periodic maintenance – to be profitable. Being successful at this is not easy.
One challenge is to find customers willing to pay more than what it costs for what you offer. Another is to keep a property fully rented since unanticipated vacancies make it harder to pay expenses.
As with any business, one must conform to local laws. Zoning restrictions may prevent a hotel from opening in a residential area. The city has authority to shut down offending businesses. Canada Revenue Agency (CRA) wants to ensure all income is declared and taxes paid. They have the right to audit any business to ensure compliance. At times the city and CRA may collaborate with municipal officers notifying CRA of businesses circumventing local laws.
All revenue must be declared. Tracking expenses is important to reduce the amount of taxes that must be paid on this income. While many view short-term rentals as something other than a business, CRA can reclassify this endeavour which means potentially higher filing costs and collection of HST. Avoidance of taxes can result in interest charges and financial penalties.
Make sure you have proper insurance. “Many people don’t realize homeowners insurance likely doesn’t cover short-term rental activity,” says Robin Shufelt, Managing Director of Duuo which provides short-term insurance for hosts. “We suggest purchasing coverage for the nights you host guests.”
Renting more than a single room can risk loss of CRA’s principal residence exemption and higher tax payments if a property is sold. Renovations intended to help generate income can turn a residential property to a commercial property according to CRA. This may include a new kitchen or bathroom, or just a second entrance to a kitchen. Claiming the capital cost allowance (CCA) on such renovations to reduce taxes is not allowed. CRA interest charges and financial penalties can result.
When renting out a condo for short-term use is allowed in a condo building and you choose to do so, following best practices helps avoid future problems.
- Include all money received in your taxable income
- Track all reasonable costs of earning this income – retain receipts
- Don’t rent out more than 40% of a property to avoid compromising the residential classification of your home
- Avoid structural changes to facilitate short-term rentals – never claim CCA if structural changes are made
- Purchase proper insurance – a homeowner insurance policy is unlikely to provide protection for hazards resulting from the short-term rental of a home.
