Why CRA Section 67.7 Matters for Short-Term Rental Hosts in Canada
Have you been renting out a property for short-period stays? What if I told you that federal government’s new rules now strip away your expense deductions if your STR is non-compliant?
Since January 1, 2024, Canada’s CRA rules deny deductions for short-term rental (STR) expenses if the property fails to meet licensing, registration, or permit requirements or if it’s located where STRs are outright prohibited.
As you keep reading this blog, you’ll know exactly whether your STR qualifies, which expenses are affected, how to calculate what you can no longer deduct, and what steps you should take to protect yourself from a higher tax bill.
Quick Summary
- Who is affected: Hosts, bookkeepers, and real-estate investors running STRs in Canada.
- What changed: CRA Section 67.7 denies deductions if your rental is non-compliant.
- What to do now: Check local rules, secure licences, and keep records before filing.
CRA Section 67.7 Explained
Section 67.7 of the Income Tax Act reshapes how expenses are treated if your property is not in full compliance with local laws. Here’s a quick look at it:
- Section 67.7 disallows income tax deductions for non-compliant STRs for tax years after 2023.
- Non-compliance is defined as failing to meet municipal or provincial licensing, registration, or permit rules or operating where STRs are banned outright.
- As the CRA explains:
“When calculating income earned from a short-term rental for a tax year after 2023, the new income tax rules do not allow the deduction of a non-compliant amount.” (CRA)
Compliant vs Non-Compliant Short-Term Rentals
| Factor | Compliant STR | Non-Compliant STR |
| Licensing | Licence or permit secured | No licence or permit |
| Zoning | Operates in permitted zone | Operates in restricted or banned zone |
| Deductions | Expenses deductible | Expenses denied for non-compliant days |
| Audit Risk | Lower | Higher |
| After-Tax Profitability | Optimized | Reduced |
Need guidance understanding these rules? Reach out to Boyer & Boyer, CPA for professional accounting and compliance support.
Defining Non-Compliant Short-Term Rentals in Canada
Not every short-term rental is automatically ineligible for deductions, but the CRA has made it very clear. Non-compliance is defined by local licensing, zoning, and permit requirements that are ignored or unmet.
Here’s where hosts and investors often run into trouble:
Licensing and Permit Requirements
- If your city or province requires a licence, permit, or registration to operate as an STR, and you don’t have it, your property is non-compliant.
- Municipal rules vary: For instance, Toronto may ask hosts to register and only allows STRs in principal residences, while Vancouver might need you to obtain a business licence tied to the principal residence and Ottawa has its own by-law requiring registration numbers on listings. Check with your municipality for the most accurate information.
Zoning or Prohibition Rules
- Some municipalities restrict STRs to principal residences or specific zones.
- Renting outside of those rules counts as non-compliance.
Periods of Non-Compliance
- Compliance is tracked by days. If you’re compliant for six months but non-compliant for another six, deductions are prorated.
- This is why accurate recordkeeping is critical.
Expenses Denied Under CRA Section 67.7
One of the toughest aspects of this new rule is the sweeping scope of expenses it affects. From interest payments to cleaning costs, the CRA doesn’t allow deductions for non-compliant days of operation. Here’s a closer look at how this plays out.
Common STR Expenses Impacted
- Mortgage interest
- Property taxes
- Utilities (hydro, heat, water)
- Cleaning and maintenance costs
- Repairs and supplies
- Advertising and booking fees
The “Non-Compliant Amount” Formula
The CRA provides a formula to calculate what you lose:
Non-compliant amount = (A × B) ÷ C
• A = total STR expenses otherwise deductible
• B = days property was non-compliant
• C = total STR days in the year (CRA)
Worked Example
- Total expenses: $60,000
- STR operated for 365 days
- Property was non-compliant for 181 days
- Non-compliant amount = $60,000 × 181 ÷ 365 = $29,753
- Deductible expenses = $60,000 − $29,753 = $30,247
- Taxable income increases accordingly, leading to a significantly higher tax bill.
Instead of reporting $15,000 profit, you’d report nearly $45,000.
Want to make sure your expenses are filed correctly? Contact Boyer & Boyer, CPA to review your STR records and optimize compliance.
After-Tax Impact of Section 67.7 on Short-Term Rental Hosts
When deductions disappear, the math changes quickly. The difference between compliance and non-compliance can amount to tens of thousands of dollars in extra taxable income. Let’s look at the real-world financial implications.
- Less flexibility in tax planning. Deductions are a primary tool for reducing taxable income. Without them, your tax bill spikes.
- Tighter cash flow. Out-of-pocket costs rise since fewer expenses offset revenue.
- Greater audit exposure. CRA can reassess past years if non-compliance is discovered.
Transitional Relief for Short-Term Rentals in 2024
There is one saving grace in the early days of Section 67.7: transitional relief. This temporary measure gives operators a chance to catch up on compliance before losing deductions. But the window to act is narrow.
- If your STR becomes compliant on or before December 31, 2024, the CRA will treat it as compliant for the entire 2024 tax year.
- Relief applies to individuals, corporations, and partnerships.
- Starting in 2025, no such relief exists. Compliance is judged day-by-day.
How to Stay Compliant and Protect STR Deductions
Compliance is no longer optional. It’s the only way to keep your tax planning intact. Fortunately, there are clear steps hosts and investors can take to safeguard their deductions. Here are practical strategies to stay on the right side of CRA rules.
Know Your Municipal & Provincial Rules
- Confirm if STRs are allowed in your area.
- Secure licences or permits required by your city or province.
- Stay on top of renewal deadlines.
Maintain Strong Records
- Keep proof of registration and licences.
- Track rental days versus non-rental days.
- Store receipts for all STR expenses.
Adjust for Partial Compliance
- Use CRA’s formula for prorating deductions when only partially compliant.
- Report accurately on rental income forms.
Consult Advisors
- Legal and tax advisors can confirm compliance, guide filings, and reduce audit risks.
Unsure if you’re fully compliant? Speak with Boyer & Boyer, CPA for tailored advice on STR compliance and deductions.
CRA Penalties and Audit Risks for Short-Term Rentals
The CRA isn’t leaving enforcement to chance. With new reporting systems and stronger audit powers, the agency is ready to pursue non-compliant operators. The risks go beyond lost deductions.
- Platforms like Airbnb and Vrbo report earnings directly to the CRA.
- Non-compliant operators risk reassessments and interest charges.
- If records are incomplete, penalties may apply for gross negligence.
What Section 67.7 Means for Real Estate Investors
For real estate investors, Section 67.7 is more than a tax rule. It’s a strategic shift. Investment properties that once looked profitable may no longer deliver returns if compliance isn’t secured.
- Market dynamics: As non-compliant hosts exit, supply may shrink in some cities.
- Portfolio risk: Investors must factor in compliance costs before purchase.
- Long-term planning: Some may pivot from STRs to long-term rentals to avoid compliance uncertainty.
FAQs on CRA Section 67.7 and Short-Term Rentals
Questions are piling up as hosts and investors navigate these changes. The CRA has provided some guidance, but many practical issues remain. Here are the most common questions and straightforward answers you can use.
- What is CRA Section 67.7?
It’s the rule that denies expense deductions for non-compliant STRs starting 2024. - Can I deduct expenses if I was non-compliant for part of the year?
Yes, prorated using CRA’s formula. - What proof is required?
Licences, permits, registration documents, and clear records of expenses and days rented. - What if I ignore the rules?
Expect denied deductions, higher taxable income, possible penalties, and interest charges.
Key Takeaways on CRA Section 67.7 for STR Hosts
Short-term rental operators can’t afford to overlook Section 67.7. Compliance now determines whether your deductions survive or vanish. Let’s recap the essentials.
- Non-compliance means no deductions
- Transitional relief is only for 2024 (finished)
- Documentation and recordkeeping matter
- Compliance is now a business risk factor for investors
Final Thoughts on CRA Section 67.7
CRA Section 67.7 marks a turning point. Deduction strategies that worked in the past are gone, replaced with strict compliance requirements. Hosts, investors, and bookkeepers must act now to protect their financial outcomes.
If your property is at risk, you have a choice: secure compliance or pay the price in higher taxes.
Talk to a tax advisor today about your short-term rental portfolio. Compliance isn’t just a legal requirement, it’s the key to keeping your deductions intact.
