Tax Implications of Airbnb Income: Rental vs. Self-Employment Income

Taxpayers renting out homes on Airbnb must report income on their tax return, with the CRA considering it as rental income or self-employment business income based on services provided. If services are basic, income is rental income, reported on Form T776. If more services are offered, income is self-employment business income, reported on Form T2125. The CRA may deny deductions for non-compliant short-term rentals in provinces and municipalities with prohibitions.

Renting out your home on platforms like Airbnb can be a lucrative side hustle, but it also comes with tax obligations. The Canada Revenue Agency (CRA) treats income from Airbnb as either rental income or self-employment business income, depending on the services provided. Understanding these distinctions is crucial for accurate tax reporting and potential benefits.

Rental Income vs. Self-Employment Income

If your Airbnb rental is considered rental income, you must report it on Form T776, Statement of Real Estate Rentals. This income is typically reported on lines 12599 and 12600 of your tax return. Rental income is defined as income from renting space and providing basic services such as heat, air conditioning, utilities, and parking. The CRA considers this income to be rental from property if you provide only these basic services [1].

Conversely, if you offer additional services like meals, security, and cleaning, your income may be classified as self-employment business income. This income is reported on Form T2125, Statement of Business or Professional Activities. The more services you offer, the greater the likelihood that your income will be considered self-employment income [1].

New Rules for Non-Compliant Short-Term Rentals

Starting in 2024, the CRA introduced new rules to address non-compliant short-term rentals. If you rent out your home in a province or municipality that has prohibited short-term rentals, the CRA will deny income tax deductions for expenses incurred to earn short-term rental income, including mortgage interest expenses [1]. Additionally, if you are not compliant with local licensing, permitting, or registration requirements, the CRA may also deny these deductions.

Expenses and Benefits

If your Airbnb income is considered rental income, you can generally deduct reasonable expenses related to earning that income. However, if you rent out only a part of your home, you can claim only the expenses that relate to the rented space. This is typically calculated by dividing the area of the available rental space by the total area of your home and then pro-rating that amount by the percentage of days in the year that the space was rented [1].

If your Airbnb income is classified as self-employment income, you must contribute both the employer and employee portions of Canada Pension Plan (CPP) contributions, which for 2025 is 11.9% up to a maximum of $7,735. On the other hand, if your income is rental income, it is not considered earned income for the purposes of claiming child care expenses [1].

Recent Case and Implications

A recent case involving a taxpayer who challenged the CRA's decision to deny him COVID-19 benefits highlights the importance of accurate income classification. The taxpayer argued that his Airbnb income should be considered self-employment income, but the court found that the CRA's classification was reasonable. The taxpayer was not entitled to the benefits because his income was classified as rental income [1].

Conclusion

Accurately reporting Airbnb income as either rental income or self-employment business income is essential for tax compliance and potential benefits. Understanding the CRA's guidelines and the new rules for non-compliant short-term rentals can help you navigate the complexities of tax reporting. Always consult with a tax professional for personalized advice.

References

[1] https://financialpost.com/personal-finance/taxes/cra-denied-taxpayer-benefits-airbnb-classification