On December 20, 2023, the Department of Finance released for consultation draft legislation to amend the Income Tax Act (the “Act”). The draft legislation is intended to implement the measure previously announced in the 2023 Fall Economic Statement to deny income tax deductions for non-compliant short-term rentals. The stated purpose of the draft legislation is to “crack down on short-term rentals which are keeping too many homes off the market.”[1]
The draft legislation, if enacted as currently proposed, applies to outlays made, and expenses incurred, after 2023.
Summary of draft legislation
The draft legislation would apply to a “non-compliant short-term rental,” which is defined to mean a residential property that is offered for rent for a period of less than 90 consecutive days that is located in a province or municipality that, at that time:
(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 a permit to operate as a short term rental, if the short-term rental does not comply with all registration, licensing and permit requirements.
The newly proposed subsection 67.7(2) of the Act provides that no amount is deductible for an outlay made, or an expense incurred, in respect of a short-term rental to the extent the outlay or expense is a “non-compliant amount” for the taxation year.
The formula for determining a “non-compliant amount” would deny a portion of the outlays or expenses of the taxpayer in respect of the use of a residential property as a short term rental based on the proportion of days in the taxation year that the short-term rental was a non-compliant short-term rental in comparison to the number of days in the taxation year that the residential property was a short-term rental.
For example, if a residential property is a short-term rental for 120 days, but is a non-compliant short-term rental for only 30 of those days, the “non-compliant amount” would be 25% of the outlays or expenses in respect of the use of the residential property as a short-term rental.
It should be noted that a non-compliant amount is currently defined in the draft legislation as the outlays or expenses “in respect of the use of a residential property as a short-term rental in the taxation year.” Thus, presumably, outlays or expenses incurred in respect of the use of a residential property other than as a short-term rental during the taxation year should continue to be deductible in accordance with the Act, notwithstanding that the short-term rental was non-compliant for a period of time during the taxation year.
Owners have until the end of 2024 to be compliant with provincial or municipal rules
The draft legislation also contains a grace period for the 2024 taxation year which will deem a short-term rental not to be non-compliant for the 2024 taxation year if the short-term rental complies with all registration, licensing and permit requirements on December 31, 2024. Thus, current owners of short-term rentals will have until December 31, 2024 to become compliant with all registration, licensing and permit requirement in their particular jurisdiction to ensure their outlays and expenses in respect of the short-term rental are deductible in the 2024 taxation year.
How can we help?
If you have any questions or would like any information regarding the taxation of short-term rentals, please contact a member of the Miller Thomson LLP Corporate Tax group.
[1] https://www.canada.ca/en/department-finance/news/2023/12/government-consults-canadians-on-major-investment-tax-credits-cracking-down-on-short-term-rentals-and-ensuring-a-fair-tax-system.html
