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Enforcement of federal government’s tax laws on short-term rentals could be difficult

tax bag with wooden houses around it Photo by Andrii Yalanskyi/Shutterstock

Last week, the federal government released its fall economic statement announcing new tax measures aimed at the short-term rental industry.

Starting January 1, 2024, any short-term rentals operating in provinces or municipalities that prohibit STRs will be denied tax deductions for rental-related expenses. The same goes for short-term rental operators who refuse to comply with their province and municipality’s licensing, permitting, or registration requirements.

This means that someone renting out cottages in Tiny Township without a licence and earning $120,000 per year will no longer receive tax deductions for expenses such as internet, mortgage, property insurance, and condo fees on their short-term rental properties. Instead, they’ll be taxed on the full $120,000, resulting in a payment of approximately $33,100.

“We’re tackling the challenge around short-term rentals, like Airbnb, by changing the tax rules so we make it less advantageous for a person to rent out a home a couple of days a week instead of putting it on the market to rent to a family to live in permanently,” says Sean Fraser, federal minister of housing, infrastructure, and communities, in a video.

But not everyone agrees with the federal government’s latest bid to shake free housing inventory. In fact, cottage country is seeing a mixed reaction to the new laws.

How it affects STR cottage operators

“Conceptually, it might make sense in large, urban centres, where there are professional Airbnb landlords operating with impunity,” says Glen Sloutsky, an STR operator and representative of the Responsible Hosts of Tiny, “but in cottage country, that is absolutely not the case. It’s almost the reverse.”

Sloutsky points out that freeing up cottage stock isn’t the way to create affordable housing. There’s no market for long-term cottage rentals, especially since many of the properties aren’t winterized. However, the new tax laws, which blanket the whole country, will limit the number of short-term cottage rentals, impacting tourism and slowing the economies of certain cottage-country municipalities.

The new tax laws could also force some cottage owners to sell. “You have a set of fixed costs with running a cottage: mortgage, property taxes, water, electrical bills, and so on,” Sloutsky says. “You’re trying to not be out of pocket too much, so you’re trying to cover those costs with some revenue from Airbnb. Most of our members are in that situation. But if all of a sudden, you’re not able to offset the revenue with those costs, you might have to sell.”

Sloutsky and the other members of Responsible Hosts of Tiny are currently locked in a court case with Tiny Township on Georgian Bay, contesting regulations introduced by the municipality around the minimum length of stay and the number of days per year a property is allowed to be rented. If the Responsible Hosts of Tiny lose the court case and don’t comply with the municipality’s regulations then operators will be ineligible for rental-related tax deductions.

How it affects cottage municipalities

Ann MacDiarmid, mayor of Seguin, Ont. in Parry Sound, says she thinks the new tax laws are a good first step in regulating short-term rentals, but agrees with Sloutsky that it’s unlikely to address the housing needs of cottage country. “We have a housing crisis here, too, but I don’t believe it’s going to be fixed by the 10-bedroom, lakefront cottage,” she says. “No, it’s going to be fixed by increasing rental stock and more attainable housing stock in our settlement areas.”

Currently, Seguin is one of the locations that doesn’t have any short-term rental regulations in place, meaning operators in the municipality will be unaffected by the new tax laws. The laws will only affect operators in cottage country municipalities that have either prohibited or regulated short-term rentals—or if they are in a province, such as B.C., that’s introduced province-wide regulations.

MacDiarmid says she is interested in introducing regulations in Seguin, which, if passed, would place the municipality under the umbrella of the feds’ new tax laws. “We have nothing against the family that rents for two weeks every year the same cottage and falls into part of the community,” she says. “The ones that are a nuisance are the stag parties, the one-day, two-day rentals where there is no regulation on the number of people as it relates to either bedrooms or septic capacity. Those are the things we would want to regulate: length of stay, impact on the lakes and the environment, and also safety.”

Unanswered questions about the short-term rental tax laws

While the new tax laws will start in just over a month, there are still questions swirling around how it will work. In an email, Terry Rees, the executive director of the Federation of Ontario Cottagers’ Associations (FOCA), questioned how the tax laws will affect short-term rental operators who don’t claim their rental revenue as income.

Sites such as Airbnb and Vrbo will likely work with the government to track properties. This will be effective in urban centres where rental competition is high and operators leverage the platforms. But in rural settings, such as cottage country, where there’s less competition, it could be harder to track properties listed on sites like Kijiji and Facebook Marketplace.

Rees also questions how the CRA will determine where someone earned their rental revenue. If, for instance, someone rents out their cottage in a municipality where short-term rentals are restricted, what’s stopping them from reporting that rental revenue as being earned on their primary residence in a location where short-term rentals are allowed.

“This will pose some administrative challenges,” Rees says.

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