Well, we’ve just received the Fall Economic Statement from our Government. In there, were a bunch of tidbits. And one change that was found on the CRA website that could be helpful to some taxpayers.
There is one in particular that I think was highly unfortunate to see. Mortgage interest is no longer an eligible expense if you use your home for short-term rentals.
Part of the 2023 Fall Economic Statement addressed the housing crisis that many Canadians are seeing with a lack of affordable housing. To combat this, the government is cracking down on short term rentals. Where short term rentals are prohibited, or where licensing/permits/registration requirements are required but where the taxpayer has not obtained appropriate licensing, the federal government intends to deny tax deductions incurred to earn short term rental income. This change is proposed for periods from Jan 1, 2024 onwards. As an example, if you own a short term rental and previously collected $100,000 of rental income, and had mortgage interest of $80,000, only $20,000 may be taxable. In 2024, if the short term rental falls subject to these rules, the entire $100,000 collected would be taxable. This could result in significant tax liability for the taxpayer.
I know that we discussed this in a previous blog post (see “You May now have a Trust Reporting Requirement Under the New Trust Reporting Rules”), but this is one of the areas that is causing a lot of concern for us at Affirm LLP.
A Bare Trusts is an entity or individual that holds title to something for the beneficial use of someone else. They are not considered to be “regular” trusts and do not have to have a formalized trust agreement. Nor have they had to file a Trust Return. However, as a part of the Budget and then formalized in Bill C-32, there are new trust reporting requirements that make it a requirement for these types of arrangements to file a tax return.
As of this month (December 2023), the CRA has created a new FAQ type of page to help all of us work through what needs to be reported and how to report it. (https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/new-trust-reporting-requirements-t3-filed-tax-years-ending-december-2023.html) According to the preamble on this page, it will be updated periodically, so it is expected that this is just the beginning of the information that they are going to provide to us. This is similar to how they managed the new Underused Housing Tax reporting requirements.
We can’t reiterate enough that if you do feel that you are in a Bare Trust arrangement, please reach out to your tax advisor and they can help you figure out what needs to be done to keep you compliant with the CRA.