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Homestay - business vs rental?

Just want to make a clarification here, if someone have student renting their house as a homestay, will that be consider as business income or rental income?

This new client of mine have homestay, and last year reported as rental… but for homestay, I say it a business, because you need to cook for them, and clean for them, etc… pretty much everything. Just like a hotel.

Any thought?

Thanks,

While I thought that this could be business income or a split business and rental income, this is what CRA had to say on this matter.

Of course that would be CRA’s current administrative policy and may or may not have the Income Tax Act, Tax Regulations, and/or Tax Court Rulings supporting this exact interpretation of the rules and laws.

https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/accommodation-sharing.html

Accommodation sharing is renting part or all of a property for a short period. It can include your primary residence or your secondary residence. It also includes any rentals facilitated by a third party, a website, or an app.

… lots of details including…

All money you receive as a result of an accommodation sharing arrangement is taxable for income tax purposes and you should report it as rental income when you file your income tax returns. Individual situations vary and the tax implications could be different depending on the specific facts of the situation.

One option would be not reporting it as rental property and instead using a cost sharing agreement (see below)
This option would only apply if the rent (usually lower than market) would not cover the deductible expenses) Not intended to make a profit.
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Could you tell me the name of the source document where you got the piece on “Renting below fair market value”?

T4036 page 15 (Rental Income Guide)
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Right or wrong, our local school board pays about $1,600/ month for high school student ‘home stays’ and TELLS the parents it is cost recovery with NO profit.

I have never had a client in this arrangement so I have never had to answer the question.

Another consideration in reporting taxable income for room and board students is the possibility of Principal Residence change of use.

Since this is part of a current CRA program, I would take great care to understand the rules and thresholds of both the income production and the partial change of use.

The key criteria the threshold in partial change of use are:-
2.59 It is the CRA’s practice not to apply the deemed disposition rule, but rather to consider that the entire property retains its nature as a principal residence, where all of the following conditions are met:

a) the income-producing use is ancillary to the main use of the property as a residence;
b) there is no structural change to the property; and
c) no CCA is claimed on the property.

REFERENCE

https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c2-principal-residence.html#N10B54

Partial changes in use

2.57 If a taxpayer has partially converted a principal residence to an income-producing use, paragraph 45(1)© provides for a deemed disposition of the portion of the property so converted (such portion is usually calculated on the basis of the area involved) for proceeds equal to its proportionate share of the property’s fair market value. Paragraph 45(1)© also provides for a deemed reacquisition immediately thereafter of the same portion of the property at a cost equal to the very same amount. Any gain otherwise determined on the deemed disposition is usually eliminated or reduced by the principal residence exemption. If the portion of the property so changed is later converted back to use as part of the principal residence, there is a second deemed disposition (and reacquisition) thereof at fair market value. A taxable capital gain attributable to the period of use of such portion of the property for income-producing purposes can arise from such a second deemed disposition or from an actual sale of the whole property subsequent to the original partial change in use. An election under subsection 45(2) or (3) cannot be made where there is a partial change in use of a property as described above.

2.58 The above-mentioned deemed disposition rule applies where the partial change in use of the property is substantial and of a more permanent nature, that is, where there is a structural change. Examples where this occurs are the conversion of the front half of a house into a store, the conversion of a portion of a house into a self-contained domestic establishment for earning rental income (a duplex, triplex, etc.), and alterations to a house to accommodate separate business premises. In these and similar cases, the taxpayer reports the income and may claim the expenses pertaining to the altered portion of the property (that is, a reasonable portion of the expenses relating to the whole property) as well as CCA on such altered portion of the property.

2.59 It is the CRA’s practice not to apply the deemed disposition rule, but rather to consider that the entire property retains its nature as a principal residence, where all of the following conditions are met:

a) the income-producing use is ancillary to the main use of the property as a residence;
b) there is no structural change to the property; and
c) no CCA is claimed on the property.

2.60 These conditions can be met, for example, where a taxpayer carries on a business of caring for children in the home, rents one or more rooms in the home, or has an office or other work space in the home which is used in connection with business or employment. In these and similar cases, the taxpayer reports the income and may claim the expenses (other than CCA) pertaining to the portion of the property used for income-producing purposes. Certain conditions and restrictions are placed on the deductibility of expenses relating to an office or other work space in an individual’s home – see Income Tax Folio S4-F2-C2, Business Use of Home Expenses (if the income is income from a business) or Interpretation Bulletin IT-352R2, Employee’s Expenses, Including Work Space in Home Expenses. In the event that the taxpayer commences to claim CCA on the portion of the property used for producing income, the deemed disposition rule is applied as of the time at which the income-producing use commenced

hmm, sound to me like there not a for sure answer for this???

However, with $1600/month, normally there a profit there I believe. Is the school board giving wrong information?

You must not have ever fed a teenager. :grinning:

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