Short-term rental of your home or vacation property
By Greg Ott, CPA, CFP, Wealth Planning Group, Assante Private Client, a division of CI Private Counsel LP.
You may have friends or neighbours who have started renting out all or part of their homes or vacation properties on a short-term rental website and you may be thinking about renting out yours.
But could this impact the principal residence exemption (PRE) that could otherwise shield the appreciation of your home or vacation property from taxation?
If your motivation is strictly personal – for example, if your short-term rentals are simply to help defray some of the costs of your property, for pet or house-sitting purposes, or to provide companionship or increased security – there may be no taxable change of use of the property for income tax purposes.
However, if your motivation is to earn a profit, this could cause the property, in whole or in part, to be subject to certain deemed disposition rules as a result of the change in use of a portion of the property from personal use to income use.
A partial change of use could arise based on the percentage of the space being rented out or based on a percentage of the time that some or all of the property is rented out.
If there is a partial change of use from personal use to rental, the general rule is that you will be deemed to have disposed of the relevant portion of your property at its fair market value, which could cause you to have a capital gain if your property has appreciated in value. You may be able to claim the PRE for the portion disposed of, if you so choose, assuming the property otherwise qualifies.
In subsequent years, you could have further deemed dispositions for tax purposes if your income use versus your personal use of the property changes.
When you ultimately sell the property (or are deemed to sell it, such as on your death), you could have a capital gain that is in part related to your personal use, for which the PRE could be used (if available), and another portion that would be a gain on your income use, which could not be shielded with the PRE, resulting in taxes being payable.
It is important to know that notwithstanding the existence of an income purpose, Canada Revenue Agency will generally not apply the deemed disposition rule on a partial change of use and will consider the entire property to retain its nature as a principal residence where all of the following conditions are met:
- The income-producing use is ancillary to the main use of the property as a residence;
- There is no structural change to the property; and
- No capital cost allowance (CCA – a depreciation deduction for tax purposes) is claimed on the property.
Aside from the income tax implications of a short-term rental, you would also need to consider other matters such as local, municipal or condominium board requirements and prohibitions, HST/PST/ GST/QST implications and property and liability insurance.
If you are thinking of getting involved in short-term rentals, there are many potential risks and issues that should be carefully reviewed with your financial, tax and legal advisors.