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If you rent out your home, be it your principal residence or a secondary home, on an accommodation sharing platform such as Airbnb Inc. or Expedia Group’s Vrbo, you are required to report your income, after deducting eligible expenses, on your tax return. The Canada Revenue Agency (CRA) may consider this income to be either rental income from a property or self-employment business income.

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The type of income you earn affects not only how you report it on your tax return, but the types of expenses you can deduct, and even whether you may be entitled to certain government benefits, as a taxpayer recently discovered in a tax case decided last month. But before delving into the details of this Airbnb case, let’s review the tax rules associated with short-term rentals.

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For starters, to determine whether the income you earn from your short-term rental is classified as rental income or business income you need to consider both the number and types of services you provide for your renters. In most cases the CRA will consider your income to be rental income from property if you rent space and provide only basic services such as heat or air conditioning, utilities, parking and laundry facilities.

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On the other hand, your income may be considered to be self-employment business income if you provide other services to renters, such as meals, security and cleaning. The more services you offer, the greater the chance that income from your rental operation is considered business income.

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If your income is considered rental income, you need to complete Form T776, Statement of Real Estate Rentals and report that income on lines 12599 and 12600 of your return. Alternatively, if you provide other services to renters, that income is considered to be self-employment income and should be reported on Form T2125, Statement of Business or Professional Activities.

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In either case keep in mind that as of 2024 the government introduced new rules governing “non-compliant” short-term rentals in an attempt to curb investment in certain residential real estate properties. Under this new rule, the CRA will deny income tax deductions for expenses incurred to earn short-term rental income, including mortgage interest expense, in provinces and municipalities that have prohibited short-term rentals.

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The CRA is also denying income tax deductions when short-term rental operators are not compliant with the applicable provincial or municipal licensing, permitting or registration requirements when it comes to their rental properties.

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Assuming your short-term rental is compliant, you can generally deduct any reasonable expenses you incur to earn rental income for the period during which the short-term rental was compliant. But, if you rent out only part of your home, such as a basement suite or spare bedroom, you can claim only the expenses that relate to the rented part of your home. This is typically calculated by dividing the area of the available rental space by the total area of your home. You then pro-rate that amount further by the percentage of days in the year that the space was rented.