Turning Vacation Rentals into a Business: What a Recent Tax Court Case Reveals
Short-term rental properties can be more than just a side hustle—they can be a legitimate business.
A December 20, 2024, Tax Court of Canada case reviewed the denial of losses from the short-term rental of properties in the Okanagan region of British Columbia. The operation had been carried on by a married couple during the taxation years 2004 to 2010. Despite early setbacks, the Court ultimately ruled in their favor, recognizing their rental activities as a legitimate business. This case sheds light on how the Canada Revenue Agency (CRA) and the courts evaluate rental activities, especially when it comes to deducting losses and reassessing past returns.
Case Overview: From Vacation Homes to a Rental Business
In 2001, a couple purchased a home in a recreational area with the intent to rent it out short-term. By 2005, they expanded their operations by acquiring the neighboring property. Despite early setbacks—including wildfires, a declining U.S. dollar, and unexpected repair delays—they remained committed to turning a profit.
The Court ultimately ruled in their favor, recognizing their rental activities as a legitimate business. Here’s why:
Key Factors That Demonstrated Business Intent
The Court considered several indicators of commercial activity:
Market Research & Planning: Before purchasing, the couple researched rental trends and determined that short-term rentals would be more profitable than long-term leases.
Operational Challenges: Limited rentals between 2006 and 2010 were due to external factors like wildfires and currency fluctuations—not a lack of effort.
Professional Management: They hired cleaners, obtained short-term rental insurance, and maintained a guest book to encourage repeat business.
Businesslike Financing: Their mortgage and repair financing reflected a commercial approach.
Strategic Furnishing: They budgeted for quality furnishings with extended warranties and protective treatments—unlike their personal property.
Marketing & Adaptation: They advertised on platforms like Airbnb and VRBO, monitored competitors, and adjusted strategies based on guest feedback.
Profitability: In later years, the properties generated significant profits.
Because these actions demonstrated a clear intent to earn income, the Court allowed the deduction of rental losses.
Statute-Barred Returns: When Can CRA Reassess?
Another important aspect of the case involved CRA’s attempt to reassess tax returns beyond the standard three-year window. Normally, this is only allowed if there’s a misrepresentation due to carelessness, neglect, or fraud.
What the Court Decided
The taxpayers genuinely believed their rental and other activities were income-generating, and they relied on professional tax preparers.
Differences in opinion with CRA did not amount to misrepresentation.
As a result, most of the years in question were statute-barred—meaning CRA could not reassess them.
However, the Court did allow CRA to disallow clearly personal expenses that had been mistakenly claimed as business-related. These errors were attributed to the taxpayers’ practice of recording expenses only at year-end, increasing the risk of oversight.
Key Takeaways for Property Owners and Investors
Treat Your Rental Like a Business: Keep detailed records, budget strategically, and adapt your operations based on market conditions.
Use Professional Help: Engaging tax professionals can support your case if CRA questions your filings.
Be Cautious with Deductions: Only claim expenses that are clearly related to income-earning activities.
Understand Reassessment Rules: CRA can’t reassess beyond three years unless there’s evidence of carelessness or misrepresentation.
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.