What is the sharing economy?
Sharing economy refers to any income (inferred or actual) earned by sharing space. CRA defines them in the following groups:
Common services would be Uber, Skip the Dishes, Airbnb, Etsy, etc. Up until recently, it was understood that if it is minimal income, you wouldn’t have to formally declare it (you should, but wouldn’t need to). CRA is starting to crack down on these types of income earners. Here’s how:
This is one of the most common and oldest forms of the Sharing Economy. It includes companies like Airbnb, VRBO, Homestay, HomeAway.ca, Booking.com Apartments, Trip Advisor Rentals and Flipkey.
It’s an area where there is very limited information on how it is taxed or whether it should even be taxed. Is it rental income or business income? Is GST/HST charged? What expenses can be claimed against the income? All of these questions have been asked and up until now, answers have not been very forthcoming.
In the debate of whether it’s rental income or business income, for individuals, the tax rate is the same regardless of how it is classified. What is different, is whether the income is subject to CPP premiums or not. Rental income doesn’t require CPP premiums to be paid out whereas business income does. So how do you determine if your Airbnb is considered rental income or business income?
A quick test would be to ask if there are any ancillary services being provided besides the basic bed, utilities, etc. If you provide cleaning and/or meal prep services, then chances are, your Airbnb is operating as a business and the income would be classified as such. However, in most cases, home sharing is still classified as rental income.
This can be a slippery slope because anytime there is a change in use of the property, it may trigger a capital gain due to a deemed disposal. What does this mean? Simply put, if the taxpayer decides to start renting out the basement of their house on Airbnb, CRA would deem that as a disposal of the residence at fair market value and a repurchase at the same price and triggering a capital gain. A change in use occurs when: The taxpayer changes all or part of their principal residence to a rental or business operation – or – The taxpayer changes their rental or business operation to a principal residence.
That’s not saying there are exemptions to this rule. The principle residence exemption still would apply which states that the homeowner may claim the residence as their principle residence for every year up to the change of use. The taxpayer is exempt from tax on the capital gain that is realized when the property sold. The taxpayer must report a capital gain on all or part of their property for the years in which the property was not designated as their principal residence. The “one-plus” rule would still apply (the taxpayer can claim one extra year on the principle residence).
If the change in use is an insignificant portion of the principle residence (such as a single room out of the entire house), then there would not be a change in use of the entire residence and thus, not trigger any capital gains etc. The only time a change in use is triggered is when the majority of the principle residence changes. Where there is no change in use, there is no deemed disposal and thus, no capital gains to account for. An example of this might be where a homeowner rents out their basement suite on Airbnb, makes no structural changes to their home and claims no CCA on the property. This could also be the case where an individual rents out their whole home for a short period.
If you are making more than $30,000 on the rental income, all taxpayers MUST register for GST and collect GST/HST. This is a double edged sword. Yes you have to collect and remit GST/HST BUT you can also claim any ITC’s against the amount collected. If you are making less than $30,000, it still may be beneficial for the taxpayer to register and claim the ITC’s; the net may result in a refund back to the taxpayer.
This too becomes a slippery slope because if the residence is deemed business, and then sold, the proceeds are subject to GST/HST which would warrant a hefty GST/HST bill. If the individual removes the property from the short-term rental market and takes it back for personal use, the ITC recovered on the basic tax content must be repaid. If the individual converts the property from short-term rental to exempt long-term rental, the individual is able to keep the ITC claimed on the basic tax content, but the individual is required to self-assess GST/ HST on the FMV (fair market value).
There may be other taxes that the taxpayer has to collect and remit. Some provinces have a lodging tax that is charged on all short term rentals (hotels, Airbnb, etc). Some provinces require PST to be charged on all short term rentals.
Taxpayers looking to rent out their properties should carefully review the provincial and municipal taxes assessed on short-term rentals in their local area. While some of these taxes are collected and remitted on behalf of the taxpayer, others are not.
Ride sharing is the other giant in the share economy. In North America, it is dominated by Uber and Lyft. If you drive for one of these companies, you must declare any income (regardless of how small) on your taxes.
Unlike other businesses, there is no minimum exemption on collecting/registering for GST. After July 1, 2017, drivers are required to collect and remit GST/ HST on all of their fares, regardless of the amount of sales. Uber and Lyft currently charge consumers GST/HST for the services but it is up to the drivers to register and collect GST/HST. Once registered, drivers are entitled to claim ITC’s against the GST collected. Drivers MUST keep detailed records of all business use of the car for audit reasons.
If you fall into the share economy, we would be happy to sit down and discuss the above in detail with you and start you off in the right direction. Contact us to book your free 1 hour consultation.