Short-Term Rentals and Home Sharing
In December 2017, City Council adopted recommendations to regulate the short-term housing market in Toronto. Those new regulations are to take effect on June 1, 2018. The regulations will include licensing requirements and limitations on what spaces can be rented and for how long. The City proposes to charge licensing fees to cover the costs of managing the new regulations.
Site Specific Regulation
Just because City by-laws may be changed to permit short-term rentals or home sharing, a person’s ability to take advantage of this market may be restricted by other rules such as restrictive covenants. For example, many condominiums have declarations or rules that restrict or prohibit short-term rentals or home sharing. Condominium boards are obligated to enforce any existing restrictions and prohibitions which can cost the offending property owner thousands of dollars or even the loss of the property.
Financing and Insurance
If you have a mortgage or a secured line of credit on the property, rental of the property, even on a short-term basis, may be a default under the terms of the lending agreements. Further, many homeowner policies may exclude or limit coverage for rental properties. Consider the consequences if a renter caused damage or caused a fire and you burned down your home. What if a renter or a renter’s guest is injured on the property? Will you be covered?
Income from short-term rentals and home sharing net of associated expenses is taxable income and must be reported. In our electronic age, the Canada Revenue Agency’s ability to audit these activities is ever-increasing.
Paying income tax on the rental income should be straight-forward. However, one needs to also consider whether capital gains tax is being triggered. The Income Tax Act deems that whenever someone changes the use of a property from personal use to income-producing or back, there is a deemed disposition for fair market value resulting in taxes being assessed on any gain upon each change in use. In certain situations, an election can be filed to exempt temporary changes of use. However, if you fail to make the election, then you could be assessed the tax. Further, there are certain tests to determine whether there has been a change in use.
With still increasing housing prices in Toronto, it would be unfortunate to make a small supplemental short-term rental income and then owe tens- or hundreds- of thousands in capital gains tax.
Harmonized Sales Taxes
Home sharing and rental income for periods of under thirty days are considered taxable supplies for the purposes of HST. That means that if you expect to earn, or have earned, gross income of $30,000 or more in a year you must register for, collect, and remit HST on that gross short-term rental income.
Further, similar to capital gains tax, HST legislation may deem each change from personal use to income-producing use and back-and-forth to be a taxable supply requiring the payment of HST on the fair market value of the property. Can you imaging paying a 13% tax of the value of your home just to get some supplemental rental income?
With federal, provincial and municipal governments looking for revenue under every rock it would be unwise to blindly forge ahead.
Remember home sharing and short-term rentals, even if in your primary residence, is a commercial operation. Treat it as such and get advice.