Home » What Airbnb Hosts Need to Know About Their Finances at Tax Time
Is there a large spare room in your house that you’re not using? Do you have a mother-in-law suite but no mother-in-law in residence currently? Have you converted your attic or basement into living space? Do you take regular or long vacations, leaving your home empty for extended periods of time?
If you answered yes to any of those questions, you’ve probably considered renting out a portion (or all) of your home or vacation property, and thanks to sites like Airbnb, you can do it whenever it’s convenient for you. Airbnb has become a popular option for travelers in Canada, with the platform reporting over 20 million guest arrivals in the country between August 2021 and July 2022. As a result, many Canadian homeowners have turned to Airbnb as a way to earn extra income.
However, managing a rental property on Airbnb can be challenging, particularly when it comes to accounting and tax compliance. This is where working with a CPA can come in handy (to say the least)
The Canada Revenue Agency (CRA), as is the case for other, more traditional rentals, has special rules for declaring rental revenue from Airbnb, which you should get familiar with as soon as possible (as in before you file your taxes this year!)
Here’s some of the basics you need to know about taxes and making money on Airbnb.
Any revenue gained from renting out your home or other property is deemed rental income by the CRA, even if it’s only for a night or two every now and again.
The money you earn from your Airbnb rental must be reported to the authorities as income on your personal income tax return, just like any other sort of income.
Before you second-guess yourself on the wisdom of the idea, remember that because you’re reporting the income, you’re also eligible to deduct expenses linked to that revenue, so the tax bite may still not be that bad.
You can claim and deduct qualified expenses linked to your Airbnb rental to offset the excess income you’re reporting from your Airbnb venture. Just keep track of all of your receipts!
Some of the more frequently applicable to landlords expenses that you can deduct for renting an Airbnb include, but are not limited to:
Other expenses that can be claimed as part of the rental income earning process include:
Keep in mind that only a percentage of these expenses are deductible, and that portion is based on the amount of your property that is being utilized to create rental revenue and the length of time that it is available and being used to earn that money, such as the number of days per year.
What is the maximum amount that can be deducted?
Another way to look at it is this: if you only rent your cottage on weekends and do so every weekend throughout the year, you will be renting it for 104 days out of 365 (2 weekends x 52 weeks/year = 104).
That implies increasing your full list of expenses linked to generating rental income by the percentage of time the unit/room is rented out. That’s computed by multiplying the number of days it’s been rented (104) by the number of days it’s been available for rent (365). 28.5 percent (104/365).
When the entire home is rented out, that example works. If you have an 8-room house and rent out two of the rooms, you must first calculate the proportion of your house that is used for the purpose of collecting rental revenue before calculating the percentage of expenses that are eligible to be claimed.
In this case, it’s two rooms out of eight, or 2 divided by eight (2/8), or 25%. Then you deduct 25% of the total eligible expenses to get at the house’s eligible expenses… But you’re not finished yet!
Because you’re unlikely to rent out two rooms for the entire year, you’ll need to figure out how many days your property was rented. If it was 60 days, for example, you’ll need to figure out how much the property was rented for the entire year (60/365), or 16.4 percent, and then multiply the expenses by that (after multiplying it by 25 percent, as explained above).
When is a rented property no longer a rented property?
It’s vital to remember when a rental isn’t deemed to be a rental. At least for tax purposes.
From the perspective of the CRA, if your rental home provides additional services to guests, such as meals or laundry, you may be operating a company rather than acting as an individual Airbnb host.
There’s no need to panic; if that’s the case, you’ll need to keep track of a few things, the most important of which is that you’ll need to report your business income and expenses as self-employment income rather than rental income, which means filling out Form T2125, Statement of Business or Professional Activities, and including it with your personal income tax return.
It is strongly advised that you maintain all of your Airbnb-related information in one place to make tax time easier and less stressful, as well as to alleviate the burden of CRA queries after tax season. It’s SO much easier to keep track of your rents and other tax-related information with a well-kept calendar than it is to dig through emails or rely on your memory.
Remember that if the CRA has to verify facts and if you are unable to provide proof or supporting papers, your claim will be denied, and you will be reassessed. The taxpayer bears the burden of evidence in the Canadian tax system.
Even though maintaining good records is part of planning ahead, this section has its own heading to emphasize the fact that self-employed income is not taxed at source like it is for someone who receives a T4.
As a result, it’s a smart idea to set aside a portion of your Airbnb income each time you have a renter. The basic rule of thumb is to set aside 25-30% of your gross income for taxes, but even putting aside 10% from each tenant will help reduce the tax bill.
Lots of new Airbnb hosts ask themselves “is it necessary for me to register for GST or HST?” The answer here is not as clear cut as you might think.
Technically, if rental periods are for fewer than 30 days (one month) and the rent charged is more than $20 per day, the Airbnb rental income is liable to GST or HST. (GST/HST is not charged on long-term residential rentals.)
While that was simple enough, determining who is responsible for charging, collecting, reporting, and remitting GST or HST can be tricky. The “Small Supplier” rule provides that if your revenue was less than $30,000 in the previous four calendar quarters, or in any single calendar quarter – a quarter is three months – you do not have to register for GST/HST.
If your revenue is more than $30,000, you must register for GST/HST. However, as we will explore momentarily, you may want to consider voluntarily registering for the GST/HST.
You must add GST/HST to whatever rate you charge for your space and return the tax to the government because Airbnb does not collect GST/HST from consumers.
Airbnb also does not disclose your information with the CRA because that would be a breach of privacy; nevertheless, if the CRA receives a court order requesting information about Airbnb users, Airbnb is required by law to provide that information to the CRA.
Keep precise documentation of all expenses incurred while entertaining guests in your home, as some of the products you purchase (such as snacks or coffee for guests) are considered a valid expense.
When you file your personal tax return, you must also file a GST/HST return and claim a refund of the GST/HST you paid in the form of a “Input Tax Credit.”
NOTE: To avoid fines and interest, make sure you file and pay on time.
If you wait until you reach the $30,000 level for Small Suppliers:
The day you reach the $30,000 Small Supplier threshold, you must register for GST/HST and begin tracking, charging, collecting, reporting, and remitting the tax to the Canada Revenue Agency.
To register for GST/HST, you have 29 days from the day you crossed the threshold. Only Input Tax Credits incurred after you’ve registered for GST/HST are eligible for reimbursement.
Tax time is not the only time that working with a chartered professional accountant will provehelpful for Airbnb hosts though. Here are some of the other ways we can help you get the most from your short-term rental business.
Maintaining accurate and up-to-date financial records is critical for Airbnb hosts. However, managing accounting and bookkeeping tasks can be time-consuming and overwhelming, especially for hosts who may have limited accounting knowledge.
An experienced accountant can help hosts manage their financial records, track their income and expenses, and ensure that they comply with all tax and regulatory requirements.
Airbnb hosts who receive payments in foreign currency may also face challenges with exchange rates and currency conversions. Depending on the exchange rate at the time of conversion, hosts may receive less than they anticipated, resulting in lower profits. An accountant can help hosts manage currency exchange issues and ensure that they are maximizing their earnings, especially when it comes to setting rates.
For most Airbnb hosts their rental is a second income. That second income can provide the kind of long-term financial security that you need, even if you are nowhere near retirement age, if it is managed and invested in the right way. Working with an accountant also means that you have access to expert financial planning. We can show you how make the most of your Airbnb earnings as a wealth building tool, and not just as a way to add extra money to your monthly income.