Short-Term Rentals and Taxes: What Ontario Real Estate Investors Should Know in 2025

Short-term rentals continue to be one of the most attractive ways to generate income from real estate in Ontario. Whether you’re investing in a downtown condo, a family cottage, or a secondary suite, platforms like Airbnb, VRBO, and Booking.com have opened up new possibilities for flexible and rewarding cash flow.

With strong returns, growing demand, and more tools than ever to manage properties efficiently, it’s no surprise investors are expanding into this space. At the same time, tax rules and municipal regulations have evolved, and understanding them is key to staying profitable and avoiding surprises.

This guide breaks down the latest tax updates, how to stay compliant, and how to keep more of what you earn—so you can invest in short-term rentals with clarity and confidence.

1. Short-Term Rental Income Is Taxable

If you rent out a property for less than 90 consecutive days at a time, that income must be reported to the CRA. It’s treated as business or rental income and taxed at your regular marginal rate.

This is standard for most real estate income—and not something to worry about if you're keeping track of earnings and expenses. With platforms now sharing data with the CRA, good record-keeping is just part of running a smooth and professional operation.

2. You Can Deduct Expenses—As Long as You’re Compliant

One of the key benefits of operating a short-term rental is being able to deduct your eligible expenses. These might include:

• Mortgage interest

• Property taxes

• Utilities

• Repairs and maintenance

• Insurance

• Cleaning and management fees

  
  

Starting in 2024, however, the CRA introduced a rule that limits expense deductions if your property is not compliant with local municipal regulations (such as missing a required short-term rental license).

The good news? If your property is licensed and meets local rules, you can continue to deduct your full eligible expenses as before.

3. Compliance Matters: Local Licensing Affects Your Deductions

To claim full expense deductions on your short-term rental income, your property must be compliant with local rules—including licensing, zoning, and registration requirements.

If your municipality requires a license (as in Toronto, Mississauga, Ottawa, and others), and you don’t have one, your short-term rental is considered non-compliant—and you could lose part or all of your deductible expenses for that year.

Partial-Year Compliance = Partial Deductions

If your license kicks in partway through the year, CRA now requires you to prorate your deductions based on how many days your property was compliant. The longer your property is unlicensed, the fewer expenses you’ll be able to claim—so it pays to register early.

For example, if you're non-compliant for the first half of the year, you could lose nearly 50% of your deductions—even if your expenses were legitimate.

2024 One-Time Grace Period

To ease the transition, CRA is offering relief for 2024: If your property is fully licensed by December 31, 2024, it will be treated as compliant for the entire year. This gives current hosts time to get licensed without losing deductions.

4. HST Rules: What to Know When Earning and Selling

Registering for HST

If your short-term rental income crosses $30,000 in a 12-month period, you’ll need to register for HST and begin charging it to guests. While this sounds like an extra layer, it also allows you to recover HST on many of your operating costs and upgrades—including furniture, cleaning services, and professional fees.

Many growing hosts find HST registration is simply part of scaling up their business.

Selling Your Property

If your property is used primarily as a short-term rental before selling, the CRA may classify it as a commercial property and apply HST on the sale. This typically applies if:

• It’s never been your principal residence

• It’s been consistently operated as a business, especially in the years just before sale

This is manageable with some tax planning and shouldn’t deter long-term investors—it just reinforces the value of getting advice before listing.

5. The Principal Residence Exemption May Still Apply

If your short-term rental is part of your home (like a basement suite), and you ordinarily live in the property, you may still qualify for the Principal Residence Exemption (PRE) when selling.

The key is documenting how the property was used and ensuring that personal use remains significant throughout the year. Mixed-use properties often qualify for partial exemptions, so it’s worth confirming with a tax professional.

6. Simple Steps to Stay Compliant and Maximize Returns

The new rules don’t make short-term rentals riskier—they just require a bit more structure. Here's what successful investors are doing:

• Apply for your STR license early

• Track your rental days and expenses

• Register for HST if approaching $30K in income

• Keep receipts and maintain clean records

• Speak to a tax advisor before selling

• Stay up to date with your city’s STR rules

Final Thoughts

Short-term rentals remain one of the best ways to generate real estate income in Ontario—especially when operated with clarity and care. The rules may have tightened, but they also bring stability and transparency to a fast-growing investment space.

With smart planning, clean records, and a compliant setup, your short-term rental can continue to deliver strong returns for years to come.