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A Simple Way to Minimize Taxes That Works for Airbnb Owners

New year resolution is tough.

Waking up early is tough when you have an event the previous night. I’m already falling off the waggon on the 2nd week of January.

But… it was a lot of fun doing a presentation on Airbnb.  I spent half a day doing my own research confirming the HST impact on the sale of Airbnb.  Most importantly, I enjoyed doing the research and learning something new.

The host of the event, Davelle Morrison, from Bosley Real Estate, has two Airbnb rentals.  What surprised me the most was that she owned one in Price Edward County, a place where one of my clients also owns an Airbnb rental.

She was telling the crowd that she provided nice salt and pepper, Keurig coffee machine and the Sand Bend Beach Pass in the past season and got a great review. 

One visitor commented how he wished she would provide olive oil in the past season.  She decided to add that to her list of items being provided.

Thanks Davelle for a great event!  

The crowd laughed at this visitor’s comment, but you wouldn’t have known the big impact this small addition of olive oil would have on her tax situation.  😉

In Canada, if you operate a hotel, you’re providing a service, not rental income. 

What it means is that if you own a hotel in a corporation, revenue from the hotel is considered active business income, taxed at a small business rate of 12.5%. 

This means that, instead of paying as high as 54% personal tax rate, your hotel income can be taxed as low as 12.5% in the corporation.  We, as accountants, have a lot of flexibility to lower your taxes for you.

Now, how’s a hotel different from a regular rental?

The hotel provides a list of services, such as laundry, towel, maid, cleaning, coffee, internet, linen, cribs, fridge, beverages, meals, etc.

They sound familiar, don’t they?

If your Airbnb is operated as if it is a hotel, and hotel income is considered as active business income, does this mean that your Airbnb income can be reported as active business income?

This can also mean that you can pay as little as 12.5% if you earn the Airbnb income in the corporation.

What?!!!!!!

Of course, when you take out the money, you may trigger personal tax – something to discuss with a professional.

Before you get all excited about the low tax rate, always remember, with CRA, we need to document everything we do.

If you do provide these services, make sure you keep a copy of the Airbnb ad to what you provide.  Make sure you have communication, or even comments printed out/documented somewhere that they enjoy all these additional services you provide.

What if you don’t provide olive oil and Sand Bend Beach pass, can you still pay less tax? 

Well, a proper structure would help.  We recently helped our clients to structure his Airbnb rental and services to minimize his taxes and maximize his borrowing capacity.

If you’re confused, I am going to do the same presentation in an upcoming event in Mississauga. You can get tickets using this link.

If you’re not interested in Airbnb, my client, Steve Ford, and my good friends, Charles & Andy, are going to talk about their small infill development progress in St Catharines at the same event. 

Here’s a video of their project: 

The project is interesting – they are creating something out of nothing.  😉  They already locked up their second site for a second development.

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

1 reply
  1. Meaghan Li
    Meaghan Li says:

    Cherry, thank you for sharing such great ideas! So attractive to have a vacation property being revenue generating via AirBnB but even better when the tax is at the “hotel” rate. You are brilliant! Thanks, Meaghan

    Reply

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