Income Tax Act now denies deductions for non-compliant short-term rentals

On June 20, 2024, Bill C-69 received Royal Assent. As previously discussed, that Bill made several amendments to the federal Income Tax Act (the “Act”) including the introduction of section 67.7. In furtherance of the Bill’s stated intention to make homes more affordable for Canadians, subsection 67.7(2) denies the deduction of expenses incurred to earn income from short-term rentals that are prohibited by, or do not comply with, provincial or municipal laws. These new rules have retroactive effect to expenses incurred after 2023.

This blog provides an overview of new section 67.7, which is of primary relevance to residential property owners or landlords involved in short-term rental activity.

Non-compliant short-term rentals

Generally, in computing their income a taxpayer is allowed to deduct reasonable expenses incurred in the course of earning rental income (provided those expenses are not otherwise prohibited by the Act). Beginning in 2024, however, the deduction of a rental expense will be denied to the extent that it is a “non-compliant amount” as defined in new section 67.7.

A “non-compliant amount” for a particular taxation year is determined by multiplying the otherwise deductible rental expense in respect of a “short-term rental” by the number of days in the taxation year that the property was a “non-compliant short-term rental”, and then dividing that product by the number of days that the property was a “short-term rental”. This formula thus permits the deduction of a rental expense for only the period of time during which a residential property is not a “non-compliant short-term rental”.

A “short-term rental” is defined as a residential property that is rented or offered for rent for a period of less than 90 consecutive days. In turn, a short-term rental will be a “non-compliant short-term rental” if it is located in a province or municipality that, at that time:

1. does not permit the operation of the short-term rental at its location; or
2. requires registration, a licence or a permit to operate the short-term rental and the short-term rental does not comply with such requirements.

For example, under British Columbia’s Short-Term Rental Accommodations Act (“STRAA”), short-term rentals in certain communities, like Vancouver, are only permitted if the property is located at the host’s principal residence (the “PR Requirement”). As a result, subsection 67.7(2) would deny the deduction of expenses incurred for any short-term rental in Vancouver that does not comply with the PR Requirement and is otherwise fully licensed to operate as a short-term rental. In addition to the STRAA, municipalities may have more restrictive bylaws that may impact whether a rental is “non-compliant” under the Act.

For the 2024 taxation year, subsection 67.7(3) provides transitional relief. If a short-term rental was compliant by December 31, 2024, the property would be deemed fully compliant for the 2024 taxation year.

Unlimited reassessment period

Under subsection 67.7(4), the “normal reassessment period” (i.e., the period during which the Canada Revenue Agency (“CRA”) may reassess a taxpayer without relying on a narrow set of statutory exceptions) does not apply to the denial of deductions under these new deduction denial rules. As such, there is no time limit by which the CRA must reassess a taxpayer in respect of an expense incurred after 2023 for non-complaint short-term rentals. Taxpayers are therefore subject to having the CRA deny expenses incurred and deducted in respect of a non-compliant short-term rental indefinitely.

Conclusion

On December 3, 2024, the Department of Finance announced the Short-Term Rental Enforcement Fund, which will deliver funding to municipalities to help ensure compliance with their short-term rental laws. To further strengthen enforcement, the British Columbia Housing Minister announced a provincial short-term rental registry on January 20, 2025. According to that announcement, short-term rental operators will have to obtain a registration number to display on their online listings by May 2025.

Taxpayers and their advisors should anticipate increased enforcement and review efforts by both municipalities and the CRA when operating short-term rentals. They must also be alert to changes in provincial and municipal laws that govern the compliance requirements for short-term rentals, as those changes can now directly impact the deductibility of expenses incurred in the operation of these properties.