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Risky Rent: Proposed Tax Bite from Non-Compliant Short-Term Rentals

Short Term Rental Tax

Estimated reading time: 3 minutes

The proposed legislation aims to deny deductions for expenses related to short-term rentals for taxpayers not complying with provincial or municipal laws. Starting January 1, 2024, expenditure deductions could be denied to address the issue of short-term rentals keeping homes off the market. In addition, the legislation specifies conditions for a non-compliant short-term rental to remain in compliance with local regulations. Further, it outlines the calculation method for the non-compliant amount of expenses to be denied, prorated based on non-compliant days. This change could significantly impact short term rental operators, increasing their tax liability. This proposal highlights the importance of compliance with local regulations. Although, the legislation could impact property valuations going forward.

In its 2023 Fall Economic Statement, the federal government unveiled a plan to address non-compliant short term rentals. The Government’s position is that Short Term Rentals are contributing to the shortage of housing for Canadians. The proposal aims to deny income tax deductions for expenses related to short term rentals for taxpayers who are not complying with provincial or municipal laws. Slated to start on January 1, 2024, the legislation aims to encourage compliance with local regulations and increase housing supply.

Proposed Short Term Rental Tax Legislation

The draft legislation released by the Department of Finance on December 20, 2023, outlines the specifics of the proposed measure. It defines non-compliant short-term rentals as residential properties offered for rent for less than 90 consecutive days, located in provinces or municipalities where short-term rentals are prohibited or require registration, licensing, or permits that the rental does not meet. The legislation details how the non-compliant amount of expenses for such rentals will be calculated and the implications for deductibility.

Impact of Short Term Rental Tax Proposal

Any non-compliant expense for short term rentals would be non-deductible for income tax purposes. The Canada Revenue Agency (CRA) would have the authority to assess or reassess tax, interest, and penalties for any taxation year after 2023. While the intention is to realign short term residential properties with the permanent housing supply, potential unintended consequences could occur. These could include discrepancies in income tax treatment based on municipal or provincial policies and the risk of short-term rental operators avoiding reporting, potentially fueling the underground economy. The Proposal could have a significant impact on property valuations in short term rental communities.

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