Your Insider’s Guide to Airbnb Taxes and Preparation
Tax season… Even the words alone can make the strongest person faint at heart, especially if that person has just started a new business and isn’t quite sure what to expect come tax time.
It reminds me of that famous quote:
“Oh man I just love tax season” – No one, ever.
But taxes are a reality, and as Canadian Airbnb hosts, we also have to face this reality in the new year.
Tax season is not that far away, and I’m sure there are some who are wondering just whether they can dodge this bullet or not.
Spoiler alert: You have to pay taxes on your Airbnb income.
Yes. But along with income, comes deductions, so let’s get into the tax weeds.
Tax Implications for Airbnb Hosts and Home-Sharers in Canada
Before you try to hide from the taxman, here are some things to consider:
- Canadians are expected to report ANY income they earn, regardless of where or how they earn it. That includes money made through part-time or full-time ventures such as home-sharing, ride-sharing, bartending, and even crowdfunding (unless of course, the crowdfunding is part of a gift or a charitable donation). Even Spiderman has to report his part-time income:
- Canadians are also expected to report when they are involved in exchanging professional services. For example, if a tax firm trades services with an advertising company, then the cash value of that service must be declared on their tax forms.
Paul McVean, a tax partner at Anklesaria McVean Professional Corporation in Toronto, said it this way, “Just because it wasn’t paid in cash, doesn’t mean that the tax consequences are any different.”
The CRA and Reporting Requirements
The Canadian Revenue Agency (CRA) has recently added a section to the T2125 form that requires Canadians to enter the URLs of any websites from which they earn income.
They are also required to note the percentage of income they earn online.
However, Canadians are NOT expected to declare income from hobbies. For example, if your grandmother sells a few crocheted angels at the local Christmas market, she wouldn’t need to declare them.
Gammy is so talented!
However, the problem comes in trying to determine when a hobby stops being a hobby and becomes a business.
The CRA considers the amount of time someone devotes to the endeavor and whether there is a reasonable expectation of profit. Gammy would be considered a business if she hires more ladies from her aquafit class to crochet, and they start selling and shipping them on eBay.
Normally, rental services like Airbnb ordinarily report rental payments they pay hosts each year to the CRA (or the IRS in the United States).
Even if they don’t, assume they do, and cover your bases.
That means that the CRA will likely know that you have participated in home-sharing and will expect to see that income reflected on your tax return.
If the CRA discovers unreported income, you will face interest on the outstanding taxes and financial penalties.
In extreme cases, if the amount is great enough, you may even face prosecution. It’s simply not worth the risk to avoid claiming rental income from home sharing.
Ontario Partners with Airbnb
The good news is that, in a bold move, Ontario has partnered with Airbnb to bring structure and order to the financial side of the home-sharing economy.
It is being heralded as the first step toward legitimizing the sharing economy. We, at Host Kick, couldn’t agree more!
Ontario Finance Minister, Charles Sousa, stated that Ontario needs to “make sure everybody is acting responsibly,” which includes ensuring that consumer rights, safety regulations, and tax laws are being respected.
Airbnb has promised, come tax season, to email its participants and remind them of their tax obligations.
Some Helpful Tips as you Prepare Your Taxes
1. Learn the current rules in your province for home-sharing income
In the US, there is a “14-day rule” which allows homeowners to rent out their homes, or portions thereof, for 14 days per year without having to declare the income, regardless of how much they earned.
However, in Canada, we have no such exemption. All income is taxable and must be reflected on your yearly tax return.
2. Keep flawless records of rental periods
If you are making money in the sharing economy, you need to treat it seriously.
Keep records for everything to do with the room or property you are renting… just as you would for a regular tenant.
This is a business; not just a hobby. Stay organized, stay professional, and be meticulous in your record-keeping.
Paul Woolford, a tax partner at KPMG, encourages all home sharers to keep good records of both income and expenses.
3. Document all business expenses
For conscientious homeowners, it’s definitely possible to reduce the amount of tax you pay each year if you properly calculate your expenses.
4. And now, the fun part – Deductions!
Please, try and contain your excitement!
Yes, you can deduct 100% of your direct rental expenses, such as:
- fees or commissions paid to the rental agency
- credit checks
- insurance for the rental
- cleaning costs
- repairs made to the rental portion of your home
- and depreciation on the cost of furnishings and equipment (limited to the rental portion of the home)
However, it’s important to note that as an Airbnb host who is only renting out a portion of your home, you are only able to claim expenses and depreciation for the percentage of the area of your house that was rented.
That means, you may also deduct a portion of your general expenses to own and operate your entire home, such as:
- mortgage interest and taxes
- insurance for your entire home
- repairs for the entire home
- Internet connection fees
- and other home maintenance expenses
5. Know how to calculate ‘apportioned deductions.’
Yeah, I didn’t know what that meant either, don’t worry.
For the purposes of Airbnb hosts, apportioned deductions may be calculated in one of two ways:
- by the PERCENTAGE OF TIME that the property was rented out during the year, or
- by the PERCENTAGE OF SPACE that was occupied by the renter while the homeowner also occupied the home.
Based on Time
This means that the deductions are based on the percentage of time the property was rented out during the year, compared to the amount of time it was used solely by the owner.
For example: if I rent out my cottage for one month of the year, I can deduct one-12th of the property taxes, insurance, and utility costs from the income I receive.
Based on Space
This is when a homeowner only rents out a portion of the house and is living in the other portions during the time of the rental. In this instance, they are able to deduct general expenses in proportion to the amount of space rented.
For example: if I had a five-room house and I chose to rent only one room in that house, then I could deduct 20% of my general expenses toward the rental income during that period.
6. Speak with your Tax Agent
There are simply too many possible scenarios in the sharing economy to list each one here. As an Airbnb host, you should consider speaking with a professional Accountant.
We highly recommended that you make an appointment with your personal tax agent today to discuss your individual tax situation.
Here are some relevant questions to discuss:
- How can I make the most of Airbnb tax deductions?
- How do I handle deductions for guest-service or host-service fees?
- Are there applicable occupancy taxes in my province?
- Do I need to pay self-employment taxes?
- At what point do I need to register for a GST or HST account? (this usually applies to people making more than $30,000 annually from these ventures)
- What forms do I need to fill out?
Now, you will be on your way to maintaining your Airbnb business and being in CRA’s good books. You don’t want to be on their naughty list, it’s worse than Santa’s.
Great job guys! You made it to the end of an Airbnb tax article! As a bonus for finishing, here is the funniest tax meme on the internet: