Introduction

Many incorporated professionals own investment properties. Some have shifted a portion of their portfolio from long-term rentals — exempt from HST, taxed as rental income — to short-term rentals through Airbnb or VRBO — which are treated differently for both HST and income tax purposes.

Where the rental property is owned by or flows through a corporation, the rules add another layer of complexity.

The HST Distinction: Short-Term Is Different

Long-term residential rentals — leases of one month or more — are exempt from HST. The landlord does not charge HST, does not collect it, and cannot claim ITCs on the property's operating costs. The property is used in an exempt commercial activity.

Short-term rentals — periods of less than one month — are taxable supplies for HST purposes. They are treated similarly to hotel accommodations. The operator must:

Charge HST on each rental at 13% (Ontario).

Remit HST collected to the CRA.

Register for HST if annual short-term rental revenue exceeds the $30,000 small supplier threshold.

Claim ITCs on the property's operating costs — cleaning, supplies, utilities — to the extent they relate to the taxable rental activity.

This is a significant difference from long-term rentals. An incorporated professional who has been renting a condo on Airbnb for 18 months without charging HST — because they assumed residential rental meant no HST — may have a retroactive HST exposure.

The Income Characterisation Question

For a corporation, the character of rental income matters beyond just the rate. Long-term rental income earned by a corporation is passive income — taxed at approximately 50.17% and included in the AAII calculation for SBD purposes.

Short-term rental income — where the operator provides significant services (cleaning, key exchange, guest support, property management) — may be characterised as active business income rather than passive rental income. If the short-term rental operation rises to the level of an active business (more than incidental services provided to guests), the income may qualify for the SBD rate.

The CRA's characterisation depends on the nature and extent of services provided, the frequency of rentals, and the overall operation of the activity. A CPA should assess this for each specific situation.

The Municipal Regulation Layer

Many Ontario municipalities — including Toronto — have enacted short-term rental bylaws that require registration, limit short-term rentals to principal residences, and impose licensing fees. Compliance with these bylaws is a municipal matter, not a tax matter. But a corporation that owns a property used as a short-term rental that is not the owner's principal residence may face both municipal compliance issues and the HST obligations noted above.

The Platform Reporting Dimension

As discussed in Article 143, online platforms — including Airbnb — are subject to reporting requirements that will result in the CRA receiving income data on Canadian hosts. A corporation that has been earning short-term rental income through Airbnb without reporting it on the T2 or remitting HST is increasingly likely to be identified through platform reporting data.

When to Speak With a CPA

For any incorporated professional who owns or is considering acquiring a property for short-term rental through a corporation, a CPA review of the HST obligations, income characterisation, and AAII implications is the right starting point — before the first booking, not after the first year.

Rotaru CPA advises incorporated professionals on investment property tax structure, HST compliance, and rental income characterisation. Book a consultation to review your rental property's tax position.