In recent months, the Federal and British Columbia governments have introduced legislative measures to discourage short-term rentals as part of broader attempts to free up units for long-term housing. Some of these measures may impact short-term rental unit owners from multiple perspectives. Potential impacts include income tax, GST, filing requirements, and other administrative compliance.

Federal Income Tax Act measure – Income Tax Act Section 67.7

On December 20, 2023, the federal government released draft legislation that proposes to deny income tax deductions after January 1, 2024 for certain expenses which are “non-compliant amounts” for short term rentals.

New Income Tax Act sections contain the following terms:

Non-compliant amount – an outlay or expense incurred to earn rental income from a non-compliant short term rental.

Residential property – a broad term which captures most housing units in Canada that are permitted for residential purposes.

Short-term rental – A residential property that is offered for rent for a period of less than 90 consecutive days.

Non-compliant short-term rental – a short-term rental that is located in a province or municipality that:

a) Does not permit the operation of a short-term rental at the location of the short-term rental; or
b) Requires registration, a license or permit to operate as a short-term rental, if the short-term rental does not comply with all registration, licensing or permit requirements.

Effect on taxpayers

The effect of this new legislation is that all expenses of a non-compliant short term rental become non-deductible for tax purposes.

Determining whether a specific short-term rental is non-compliant may be difficult as it will depend on the specific provincial and municipal regulations.

British Columbia Provincial measure – Principal Residence Requirement

BC has introduced new legislation in the form of Bill 35, Short Term Rental Accommodations Act (STRAA). This law creates a “principal residence requirement” that is applicable in certain areas of the province as of May 1, 2024.

Prohibition of short-term accommodation other than on principal residence

Unless the short-term rental accommodation is provided on “exempt land”, or carved out specifically by another exemption, this new requirement will altogether prohibit rentals for less than 90 consecutive days unless they are made in:

a) The host’s principal residence, or
b) Not more than one secondary suite or accessory dwelling unit that is on the same parcel as the host’s principal residence.

Registration and business license

Short-term rental providers must now register as such and must display a business license on their rental listing.

Increased fines and tickets

The maximum fine that regional districts can set for offences under the new act related to short-term rental non-compliance has increased from $2,000 to $50,000.

The maximum municipal fine has increased from $1,000 to $3,000.

Other Measures – Underused Housing Tax (UHT)

In addition to the measures discussed above, other federal legislation produced in recent months and years partially intended to reduce short-term rentals in Canada includes the UHT. The UHT is a federal tax applied to vacant or underused housing in Canada. Generally, this tax targets foreign property owners, but in certain cases Canadian owners may be impacted.

Impact

The government hopes that the above measures will lead to additional housing availability and affordability. Whether or not this result is accomplished remains to be seen, as do other potential effects on the overall economy.

Taxpayers who are currently renting units on a short-term basis should pay careful attention to the new rules, as the significant penalties and denial of expenses could cause significant headaches and costs both now and in the future.

 

Written by: Chris Brien, CPA, CA

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