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Navigating Canada's New Short-Term Rental Tax Rules (June 2025)

Starting in 2024, Canada has introduced significant changes to its tax code affecting short-term rental properties. The primary goal of these amendments is to disallow expense deductions for certain "non-compliant" short-term rentals.

Understanding the New Expense Deduction Rules

Traditionally, owners of rental properties could deduct various expenses for tax purposes, including maintenance, utilities, insurance, and mortgage interest. However, under the new legislation, these deductions will be denied for short-term rentals classified as non-compliant.

A short-term rental is defined as a residential property rented for periods of fewer than 90 days. A rental is considered "non-compliant" if it:

• Fails to meet registration, licensing, and permit requirements.

• Is located in a city or municipality where short-term rentals are prohibited.

If a short-term rental is non-compliant for only part of the tax year, only the expenses incurred during that non-compliant period will be non-deductible. The non-deductible amount is calculated using the following formula:

A×(B/C)

Where:

• A = Total expenses on the property during the year.

• B = Number of days the property was non-compliant during the year.

• C = Number of days the property was available as a short-term rental during the year.

Example: Imagine a property rented for short-term stays throughout the year, with total annual expenses of $40,000. If the owner only obtained their short-term rental license on April 1st, the property was non-compliant for the first 90 days of the year.

Using the formula:

• A=$40,000 (total expenses)

• B=90 (days non-compliant)

• C=365 (days available as short-term rental)

Non-deductible expenses = $40,000×(90/365)=$9,863.01

Therefore, the owner could only deduct $30,136.99($40,000−$9,863.01) in expenses against their rental revenue for the year.

2024 Transition Rule: For the 2024 tax year only, if a short-term rental property achieves compliance by December 31, 2024, it will be deemed compliant for the entire year. This measure, implemented by the Canada Revenue Agency (CRA), aims to facilitate initial compliance with the new regulations.

Recommendations for Short-Term Rental Owners

To avoid being deemed non-compliant and losing expense deductions, short-term rental property owners should take the following steps:

1. Check Local Regulations: Before renting out a property short-term, thoroughly research local bylaws to confirm that short-term rentals are permitted in your area.

2. Understand Requirements: If permitted, identify and understand all specific regulations, including licensing, zoning, and permit requirements.

3. Obtain Necessary Permits/Licenses: Apply for and secure any required permits or licenses to ensure full compliance.

4. Maintain Meticulous Records: Keep all expense receipts. This is crucial for verification in the event of a CRA audit.

5. Consult a Professional: If you have any uncertainty regarding compliance requirements or maximizing deductions, it is highly recommended to consult with an accountant.

HST and Short-Term Rentals

The application of Harmonized Sales Tax (HST) to short-term rentals also requires careful consideration:

• General Rule: HST is generally exempt for long-term residential rentals but is charged on short-term rentals.

• Mandatory Registration: If a short-term rental property owner earns more than $30,000 in income over four consecutive three-month periods, they are required to register for HST in the quarter their income exceeds this threshold. This obligates them to collect and remit HST on their sales, but also allows them to claim input tax credits (refunds) for HST paid on eligible expenses.

• Small Supplier Exemption: If income over four consecutive quarters never reaches $30,000, the owner is considered a "small supplier" and is not required to register for HST. However, they can choose to register voluntarily.

First Home Savings Account (FHSA) (May 2025)

The First Home Savings Account (FHSA) is a powerful new registered plan in Canada designed to make homeownership more accessible. It offers a unique combination of tax benefits: your contributions can be tax-deductible on your income tax returns, and when you make qualifying withdrawals to purchase or build your first home, those funds are not included in your income – meaning they're tax-free!

Who Qualifies for an FHSA?

To open an FHSA or make a qualifying withdrawal, you need to meet specific "First-Time Home Buyer" criteria. 

• General First-Time Home Buyer Definition: You (and your spouse or common-law partner, if applicable) must not have owned or jointly owned a qualifying home as your principal residence at any point during the calendar year the account is opened (or withdrawal is made) or in the four preceding calendar years.

• To Open an FHSA: In addition to the above, your spouse or common-law partner must not have owned a qualifying home as their principal residence at any time during the year you open the account or the four previous calendar years.

• Other Eligibility for Opening: You must also be a Canadian resident, at least 18 years old, and 71 years old or younger as of December 31st of the year you open your FHSA.

Example: Let's say John, 27, bought a property when he was 19 and has always rented it out, never living in it himself. He currently rents an apartment as his principal residence. John would be eligible to open an FHSA because, even though he owns property, it has never been his principal residence. His principal residence is currently rented.

Contributing to Your FHSA: Room and Limits

Once your FHSA is established, you can immediately begin contributing, but only up to your available FHSA contribution room.

• Initial Room: In the year you open your FHSA, you receive $8,000 in contribution room.

• Annual Room: You'll gain another $8,000 in contribution room each subsequent year.

• Lifetime Maximum: The total lifetime contribution room is capped at $40,000.

• Multiple FHSAs: If you've opened more than one FHSA, your total contribution room is shared across all your accounts.

• Carry Forward Rules: Unused contribution room does carry forward to future years. However, there's a specific rule: only $8,000 of unused contribution room can carry forward from one year to the next. For example, if you open your account and don't contribute for two full years, in the third year, your accumulated room won't be $24,000 ($8k + $8k + $8k), but rather $16,000 ($8,000 for the current year plus the $8,000 maximum carry-forward from previous unused room).

Making Transfers To and From Your FHSA

The FHSA allows for certain transfers that can be beneficial:

• Direct Transfers: You can generally make direct transfers between your RRSP and FHSA, or between different FHSAs, without triggering immediate tax consequences. For an RRSP to FHSA direct transfer, you'll need to complete Form RC720. For transfers between FHSAs, use Form RC721.

• Important Note on RRSP Transfers: While direct transfers from an RRSP to an FHSA are tax-deferred, this type of transfer reduces your FHSA participation room and does not restore your RRSP deduction room.

• Indirect Transfers: Be aware that withdrawing funds from one account (RRSP or FHSA) and then contributing them to another FHSA is considered an "indirect transfer" and will result in immediate tax consequences.

• Spousal/Common-Law RRSP Transfers: Transfers from a spousal or common-law RRSP are permitted, but not if the spouse or common-law partner contributed any amounts to any spousal or common-law partner RRSPs in the current year or the two previous years.

Tax Deductions for FHSA Contributions

A key benefit of the FHSA is the ability to deduct contributions made to your account on your income tax return. However, transfers (from an RRSP or between FHSAs) are not deductible. The maximum lifetime deduction you can claim is your $40,000 lifetime contribution limit, reduced by any amounts directly transferred from your RRSP to your FHSA. Any FHSA contributions you make but don't claim as deductions in the current year can be carried forward and deducted in future years, even if your FHSA account closes.

Making a Qualified (Tax-Free) Withdrawal

For withdrawals from your FHSA to be tax-free (known as "qualified withdrawals"), you must meet several conditions at the time of withdrawal:

• You must be a First-Time Home Buyer at the time of withdrawal (meeting the specific criteria for withdrawals).

• You must have a written agreement to buy or build a home before October 1st of the year following the year the withdrawal is made.

• You must not have acquired the home more than 30 days before the withdrawal date.

• You must be a resident of Canada when you acquire the home.

• You must occupy or intend to occupy the home as your principal residence within one year after buying or building it.

• You must complete Form RC725.

FHSA Overcontributions and Penalties

It's crucial to manage your FHSA contributions carefully to avoid overcontributions. If you overcontribute, a penalty of 1% per month is applied to the highest excess contribution amount in your FHSA for that given month.

Example: If you open your FHSA on May 1st and contribute $9,000, and then add another $1,000 on May 14th, your penalty for May would be $20 (1% of the $2,000 excess, as your room was $8,000). If you then contribute another $1,000 on June 1st, and make no further contributions in June, your penalty for June would be $30 (1% of the $3,000 excess).

To reduce or eliminate excess contributions, you must make either a designated withdrawal (up to the amount of your contributions) or a designated transfer (up to the amount transferred from your RRSP to your FHSA). If both contributions and transfers led to the overcontribution, you might need a combination of both to correct it.

When Your FHSA Closes

Your FHSA is not meant to be a permanent account. It will automatically close on December 31st of the earliest year in which any of the following events occur:

• The 15th anniversary of opening your very first FHSA.

• The year you turn 71 years old.

• The year after you make your first qualified withdrawal from your FHSA.

If there's any remaining property in your FHSA when it loses its FHSA status, that amount will be included in your income at its fair market value. However, you have the option to make a direct transfer of these remaining funds to your RRSP or RRIF account on a tax-deferred basis, and this transfer will not affect your RRSP deduction room or your FHSA participation room.

T1135 Foreign Income Verification Statement (April 2025)

There are severe financial penalties for failing to comply with the CRA foreign reporting requirements. The penalty for failure to file is up to $2,500 per year, even if you do not owe any taxes. If you hold any of the specified foreign property described below and at any point in the year the total cost was more than $100,000, please contact us to discuss whether you need to file this form and what information we need.

All Canadian resident taxpayers are required to file a T1135 Foreign Income Verification Statement if at any time in the year the total cost of all specified foreign property was more than $100,000 CAD. The form is due April 30 for most individuals, or June 15 for self-employed individuals.

Specified foreign property includes:

• Funds (i.e. USD bank account with Wells Fargo) or intangible property (i.e. patents, copyrights) situated, deposited, or held outside Canada

• Tangible property situated outside of Canada (i.e. real estate)

• Shares of a foreign corporation

• Interest in a foreign trust

• Debt owed by a non-resident, including government and corporate bonds, debentures, mortgages, and

• Loans receivable

• Interest in a foreign insurance policy

• Precious metals, gold certificates, and futures contracts held outside Canada

• Cryptocurrency such as Bitcoin and Ethereum, and NFTs

Specified foreign property does not include:

• Property that is primarily personal use (i.e. Florida condo that is not rented)

• Foreign property held in an RRSP, RRIF, or TFSA account

• Foreign property held by a Canadian mutual fund

• Foreign pension plans (i.e. 401(k), IRA, Roth IRA)

• Foreign funds held in a Canadian bank account (i.e. USD bank account with CIBC)