The world of hosting has shifted beneath our feet. If you are one of the thousands of Canadians managing a property on Airbnb or VRBO, you have likely felt the pressure of evolving regulations over the last two years. Gone are the days when listing a spare room or a vacation cottage was a simple “set it and forget it” income stream. As we close out 2025, the landscape for Short-Term Rentals in Canada looks vastly different than it did just a few years ago.
Between federal crackdowns on housing availability and stricter municipal bylaws, the government has tightened the reins. For many, this has been a source of anxiety. We understand the hustle—you have put time, money, and heart into creating a welcoming space for guests. However, ignoring these tax changes is no longer an option. This guide will walk you through the new reality of taxation for hosts, ensuring you stay profitable and, most importantly, compliant.
The Big Shift: Federal Income Tax Deductions Denied
The most significant change that has rocked the hosting community is the federal government’s move to deny income tax deductions for non-compliant listings. This rule, which kicked into full gear starting in the 2024 tax year, is now the established standard for filing your 2025 returns.
Understanding the “Denial of Expenses” Rule
In the past, even if you were operating in a grey area of municipal law, the Canada Revenue Agency (CRA) generally allowed you to deduct legitimate business expenses—like mortgage interest, internet, property taxes, and cleaning fees—against your rental income. That safety net is gone.
If your short-term rental is non-compliant with local laws, you cannot claim any expenses against that income.
This means if you earn $40,000 CAD in revenue but have $30,000 CAD in expenses, you are now taxed on the full $40,000 CAD if you are found to be non-compliant. This effectively turns a profitable side gig into a massive tax liability. The government’s goal is clear: to disincentivize using housing for short-term stays in areas where long-term housing is desperately needed.
Defining “Non-Compliant”
How do you know if you fall into this trap? The CRA looks at two main criteria:
- Prohibited Areas: You are operating in a municipality or province that explicitly bans Short-Term Rentals in Canada.
- Missing Documentation: You are operating in an area that allows rentals, but you have failed to obtain the necessary registration, license, or permit.
For the 2025 tax year, the “transitional relief” we saw in early 2024 is no longer applicable. You must be compliant for the days you want to claim expenses. The CRA calculates this denial on a prorated basis. If you were non-compliant for 100 days of the year, you lose the right to deduct expenses for that specific portion of the year.
GST/HST Obligations for Hosts
While income tax deductions are getting the headlines, the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) remain a critical area of confusion for many hosts.
The $30,000 CAD Threshold
It is vital to remember that short-term rentals are considered a commercial activity in the eyes of the CRA. This differs from long-term residential rentals, which are generally exempt from GST/HST.
- Small Supplier Rule: If your total taxable revenues (from all your commercial businesses combined) are $30,000 CAD or less over four consecutive calendar quarters, you are considered a small supplier. You do not have to register for or collect GST/HST.
- Mandatory Registration: Once you cross that $30,000 CAD mark, you must register for a GST/HST account. You are then required to charge the applicable tax rate (depending on your province) on your nightly rates.
Note: If you use a platform like Airbnb, they often collect and remit the tax on your behalf. However, you are still responsible for registering if you hit the income threshold. Do not assume the platform covers all your legal bases regarding registration.
Business Income vs. Rental Income
Another area where hosts often stumble is the classification of their earnings. Are you earning passive rental income, or are you running an active business? The distinction matters for your Canada Pension Plan (CPP) contributions and how you file your taxes.
When Does Hosting Become a Business?
The CRA distinguishes between “rental income from property” and “business income” based on the level of services you provide.
- Rental Income: You provide basic accommodation. You might offer parking, laundry, and utilities. This is reported on Form T776.
- Business Income: You provide additional services that are more akin to a hotel or Bed & Breakfast. This includes cleaning during the guest’s stay, providing meals, security, or organizing tours.
If your operation falls under “business income,” you must pay CPP contributions on those earnings (if they exceed $3,500 CAD). For many hosts deeply involved in the day-to-day management of Short-Term Rentals in Canada, this classification is becoming more common as guest expectations rise.
The Digital Platform Transparency
You might be wondering, “How does the CRA even know if I am renting out my basement?”
As of the 2024 tax year, digital platforms like Airbnb, VRBO, and others are legally required to collect and report information to the CRA. This includes:
- Your identity and tax identification number.
- The address of your rental property.
- Your total revenue earned.
There is no hiding in the shadows. The data sharing between these tech giants and the federal government is now seamless. If the income you report on your T1 General does not match what Airbnb reported to the CRA, you can expect an audit letter.
Navigating Municipal Bylaws in 2025
The golden rule for 2025 is: Local compliance equals federal deduction eligibility.
Why Municipal Permits Matter More Than Ever
Previously, a municipal fine for operating without a license was a nuisance—a cost of doing business. Now, that lack of a license triggers the federal denial of expenses we discussed earlier.
We have seen aggressive enforcement in major cities. Toronto, Vancouver, and Montreal have strict principal residence requirements, meaning you can only rent out your own home for short periods, not an investment property you don’t live in. Smaller towns in tourist-heavy regions like the Okanagan or the Muskoka are following suit with their own caps and licensing fees.
Steps to Ensure Local Compliance:
- Check Zoning: Confirm your property is zoned for short-term accommodation.
- Principal Residence: Verify if your city restricts rentals to your primary home.
- Display Your License: Most platforms now require you to display your municipal permit number on your listing. Ensure this is valid and up to date.
Strategies for Hosts Moving Forward
If you are feeling squeezed by these new rules regarding Short-Term Rentals in Canada, you are not alone. However, there are paths forward.
Professionalize Your Operation
Treat this like the business it is. Ensure you have a dedicated bank account for your rental. Hire a bookkeeper who understands the specific nuances of Canadian real estate tax. If you are compliant, you can still deduct significant expenses, including Capital Cost Allowance (CCA) on the building and furniture (though be careful about recapture when you sell).
Consider the Long-Term Pivot
For investors who own secondary properties that are no longer viable as short-term rentals due to the principal residence rules or the denial of deductions, shifting to long-term tenants is a safe harbor.
- Pros: Stable monthly cash flow, generally exempt from GST/HST, and fully deductible expenses.
- Cons: Lower potential revenue ceiling compared to peak seasonal short-term rates.
The “Mid-Term” Rental
Some hosts are finding success with rentals of 30 days or more. In many jurisdictions, rentals over 28 or 30 days are considered residential tenancies rather than short-term accommodations. This often bypasses the strict short-term bylaw restrictions and the GST/HST requirement, while still allowing for higher monthly rates than a standard one-year lease (think corporate housing or insurance claims).
Conclusion: Adapt to Survive
The era of the “wild west” for Short-Term Rentals in Canada is officially over. The government has successfully closed the loop between municipal bylaws and federal tax policy. As we head into 2026, the most successful hosts will be those who prioritize compliance above all else.
Do not let these changes paralyze you. Instead, use them as a motivation to audit your business model. Are you fully licensed? Are you registered for GST/HST if needed? Is your bookkeeping audit-proof?