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.

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 . 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.

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.

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. 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.

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 . 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.

If your short-term rental is considered to be rental income, as is more often the case, then you don’t need to make Canada Pension Plan (CPP) contributions on that rental income. But, if your income is self-employment income, you would need to contribute both the employer and employee portions of CPP, which for 2025 is 11.9 per cent, up to a maximum of $7,735.

On the other hand, if your short-term rental income is classified as business income, then it’s considered to be “earned income” for the purpose of

claiming child care expenses . Under the Income Tax Act, eligible child care expenses can be deducted by the lower-income parent up to two-thirds of their earned income. If the short-term rental income is classified as rental income, however, that income isn’t considered to be earned income for the purposes of the child care expense deduction.

Finally, the proper classification of short-term rental income also has implications for claiming government benefits, as a taxpayer found out in a recent case involving COVID-19 benefit payments. The case, heard in Federal Court, involved a taxpayer who challenged the CRA’s decision to deny him benefits and asked the court to review the decision to determine whether it was reasonable.

When the pandemic hit, the taxpayer applied for and initially received a variety of benefits, including the Canada Emergency Response Benefit (CERB), the Canada Recovery Benefit (CRB) and the Canada Worker Lockdown Benefit (CWLB). The CRA subsequently decided to validate the taxpayer’s entitlement to the benefits, and concluded that he was ineligible for the all of these benefits as he had not earned at least $5,000 in employment or self-employment income in the prescribed periods, and because he had not stopped working or had his hours reduced, for reasons related to COVID-19.

The taxpayer argued that the CRA erred in classifying his Airbnb income as rental income, rather than self-employment income eligible for the benefits, since the Agency failed to consider evidence of his operations and the services provided to his guests.

Before COVID, from 2016 through 2019, the taxpayer reported his Airbnb income as rental income, not as self-employment income. He reported no other income in 2020 or 2021 (aside from COVID benefits), and he didn’t claim any expenses that showed additional services being offered other than the rental of the space. The taxpayer confirmed that the majority of the services for his Airbnb listing was cleaning and preparing for the next guests’ arrival, and there was no further evidence to substantiate that any additional services were provided.

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The judge therefore found that it was reasonable for the CRA to conclude that the taxpayer’s Airbnb income did not qualify as self-employment income. As a result, he was not entitled to the COVID benefits.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

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