Published: January 22, 2025
Location: Ottawa, Ontario
Source: Canada Revenue Agency

Introduction

Starting with tax years after 2023, the Canada Revenue Agency (CRA) has introduced new rules that can significantly affect how short-term rental income is taxed. If you rent out a residential property for less than 90 consecutive days, it’s important to understand both the updated treatment of rental expenses and which expenses remain deductible. This blog post breaks down the changes to eligible deductions for non-compliant short-term rentals and outlines the range of rental expenses you can claim.

Understanding the New Short-Term Rental Rules

What’s Changed?

For tax years following 2023, if your short-term rental does not comply with local registration, licensing, or permit requirements—or if it’s located in an area where short-term rentals are not permitted—the CRA will limit the amount of deductible expenses. Instead of deducting all your costs, you must adjust your claimed expenses by calculating a “non-compliant amount” using the formula:  A x B ÷ C

Where:

• A is the total expenses you would normally deduct for the rental property.
• B represents the number of days your property was non-compliant during the tax year.
• C is the total number of days the property was available for short-term rental.

This means that if your rental was non-compliant for part of the year, only a portion of your expenses will be deductible. In our example (detailed later), failing to secure a required rental license until mid-year resulted in a significant reduction in allowable expenses.

A Practical Example

Imagine you own a condominium that must be licensed to rent for less than 30 consecutive days. In 2025, you rented it out for 300 nights at $250 per night, generating $75,000 in revenue. You incurred $60,000 in expenses over the year. However, you only obtained the rental license on July 1, meaning that for 181 days your rental was non-compliant. Using the formula:

• A: $60,000 (total expenses)
• B: 181 days (non-compliant period)
• C: 365 days (total rental availability)

The non-compliant portion of your expenses would be: 60,000×181/365≈$29,753

Thus, you would be allowed to deduct only $60,000 – $29,753 = $30,247, which in turn increases your taxable profit compared to a fully compliant rental operation.

Deductible Rental Expenses

Regardless of the changes to short-term rental rules, the CRA continues to allow a wide range of expenses if they are reasonable and directly related to earning rental income. These costs can be divided into current expenses (recurring costs) and capital expenses (long-term improvements or investments). Below is an overview of the most common deductible rental expenses, explained in straightforward terms:

Advertising

Costs related to promoting your rental property are deductible. This includes ads in newspapers, on radio and TV, or online, as well as any fees paid to find tenants.

Insurance

You can deduct the premiums you pay for insuring your rental property during the current tax year. For policies covering multiple years, only the portion attributable to the current year can be claimed, with the rest being deducted in the corresponding future years.

Interest and Bank Charges

Expenses such as mortgage interest and bank fees directly related to your rental property financing are deductible.

Office Expenses

These include everyday items like stationery, postage, and minor office supplies used in managing your rental activities. However, major purchases like filing cabinets or computers (capital items) must be treated separately.

Professional Fees

Legal, accounting, and other professional fees incurred for preparing leases, managing tenant disputes, or seeking tax advice are deductible. Note that fees associated with buying the property must be allocated between the land and the building and are not immediately deductible from rental income.

Management and Administration Fees

If you pay a property manager or an agent to oversee your rental property, their fees are deductible. This also includes commissions paid to real estate agents for finding tenants.

Repairs and Maintenance

Costs for minor repairs and upkeep—such as painting, fixing leaks, or replacing broken fixtures—are deductible. The labor you personally provide is not counted, and larger repair projects that improve the property’s value may be considered capital improvements.

Salaries, Wages, and Benefits

If you employ someone to help manage or maintain your property (for example, a superintendent or maintenance worker), you can deduct their wages and benefits. Ensure you also factor in required payroll deductions such as CPP, EI, or any local contributions.

Property Taxes

Any property taxes paid on your rental property for the period it is available for rent can be deducted.

Travel

Expenses incurred while traveling to your rental property for purposes such as collecting rent, supervising repairs, or handling emergencies are deductible. However, personal expenses like meals and lodging are not included unless they are directly tied to the rental activity.

Utilities

If your rental agreement specifies that you pay for utilities such as electricity, water, gas, or cable, these costs are fully deductible.

Motor Vehicle Expenses

If you use your vehicle to manage or service your rental property, you may deduct a portion of your vehicle expenses, provided you keep detailed records of mileage and purpose.

Other Rental Expenses

This is a catch-all category for any other reasonable expenses directly related to earning rental income that do not fall under the categories above.

2024 Transition Relief Exception

For the 2024 tax year only, if your short-term rental meets all local registration, licensing, and permit requirements by December 31, 2024, it is considered compliant for the entire year—even if it was non-compliant for part of the year. This transitional relief does not extend beyond 2024, so it is vital to ensure your rental remains compliant in subsequent years.

Record-Keeping and Compliance

Maintaining detailed and accurate records is essential. Ensure that you keep copies of all receipts, invoices, and relevant documents, including proof of compliance with local rental regulations. The CRA may request these records during an audit to verify that your expense claims are legitimate.

Conclusion

The recent changes to the tax rules for short-term rentals underscore the importance of staying compliant with local regulations. In addition to understanding how non-compliance can reduce your deductible expenses, you should be aware of the wide array of rental expenses that remain deductible under CRA guidelines. By keeping precise records and ensuring compliance, you can manage your rental income more effectively and reduce the risk of unexpected tax liabilities.

If you have any questions about how these changes affect your situation, consider consulting with a tax professional who can provide tailored advice based on your unique circumstances.