If you rent out residential properties for periods of less than 90 consecutive days, changes coming in 2024 will impact your ability to claim income tax deductions. Here’s everything you need to know to stay compliant and optimize your deductions.
Table of Contents
Key Changes Starting in 2024
Non-Compliant Rentals and Deduction Restrictions
Starting in 2024, taxpayers cannot claim income tax deductions for expenses related to non-compliant short-term rentals. Non-compliance applies in the following scenarios:
- The rental is located in an area where short-term rentals are prohibited by provincial or municipal regulations.
- The property lacks the necessary permits, licenses, or registrations required for short-term rental activities.
Definition of Short-Term Rentals
Short-term rentals include residential properties such as:
- Houses
- Apartments
- Condominiums
- Cottages
These properties must be rented for periods of less than 90 days and must comply with local laws governing short-term rentals to qualify for tax deductions.
Impact on Deductions
Deductible Expenses
For compliant rentals, taxpayers can deduct reasonable expenses incurred to earn rental income. Deductible expenses fall into two categories:
- Current Expenses: Advertising, insurance, repairs, utilities, salaries, property taxes, and professional fees.
- Capital Expenses: Costs related to significant improvements or modifications, such as accessibility upgrades or older property renovations.
New Formula for Non-Compliant Rentals
Under the new rules, expenses tied to non-compliant rentals cannot be deducted. The non-compliant portion is determined by the following formula:
Non-Compliant Amount = (A × B) ÷ C
Where:
- A = Total deductible expenses for the year
- B = Number of non-compliant rental days
- C = Total rental days in the year
Example Calculation
Consider a property rented out for 300 days in 2025 at $250 per night, generating $75,000 in revenue, with $60,000 in expenses. If the property was non-compliant for 181 days:
- Non-Compliant Portion: $60,000 × 181 ÷ 365 = $29,753
- Deductible Expenses: $60,000 – $29,753 = $30,247
- Taxable Profit: $75,000 – $30,247 = $44,753
Transition Relief for 2024
To ease the transition, the Canada Revenue Agency (CRA) has introduced temporary relief for 2024. Taxpayers can deduct the full amount of expenses if the property becomes compliant by December 31, 2024.
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Importance of Record-Keeping
To ensure compliance, maintain accurate records, including:
- Documentation of licenses and permits
- Proof of compliance with local laws
The CRA may conduct audits to verify that deductions align with the new regulations.
Final Thoughts
If you’re involved in short-term rentals, these updates emphasize the importance of compliance with local laws. Adhering to the new rules ensures you maximize deductions while avoiding penalties. Be proactive in securing necessary permits and keep meticulous records to safeguard your deductions.
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