Renting out your cottage: rules, income and tax

Rental income can cover a good share of a cottage's costs. It can also be the first thing to fall apart after closing, because the right to rent is set by the township, not by the seller or the listing. Rules have tightened across cottage country in the last few years. Treat rental income as a bonus until you have confirmed it in writing.

Licensing varies by township

Ontario has no single province-wide short-term rental law. Each municipality decides if it will license, limit or ban short-term rentals. The definition changes too. Many bylaws use 28 days or less, and some use 30.

Here are examples from municipal sources as of 2026. Bylaws are amended often, so check the township's website for the current version.

• Township of Muskoka Lakes. A licensing bylaw covers rentals of 28 consecutive days or less. Occupancy is set at two people per bedroom, and an owner can ask for more by showing the septic system can handle it. Extra summer rental restrictions took effect May 1, 2026.
• Town of Huntsville. A licence is required for rentals of 30 days or less. The town caps the number of licences, and an owner must have held the property for a full year before applying. Short-term rentals are no longer permitted in one of its urban residential zoning areas.
• Town of Gravenhurst. A licence is required for rentals of 28 days or less, and it must be in place before you advertise. Bunkies, trailers, tents and garages cannot be rented.
• City of Kawartha Lakes. A business licence is required for stays of less than 28 days in a row. The property must have adequate water and septic systems, and the septic has to be shown on a site diagram.
• Haliburton County. The four local townships worked with the county on a common licensing bylaw. In Highlands East, anyone renting for less than 28 days has needed a licence since October 1, 2024, and the licence number must appear in any ad.

Other common rules include a local contact who can reach the property quickly, parking limits, fire safety plans, demerit points and fines for guests and owners.

Occupancy is tied to the septic system

Most bylaws cap guests by bedroom count, often two per bedroom, and then by what the septic system was built to handle. In Highlands East, for example, the owner must give proof of septic maintenance, such as the use permit and a recent pump-out receipt.

That means the septic permit sets your rental income. A cottage advertised as sleeping twelve, with a septic system approved for three bedrooms, may be licensed for six. Count legal bedrooms, not beds. Our guide to septic systems, wells and lake water explains how to get the permit.

Insurance

A standard cottage policy usually does not cover paying guests. Tell your insurer or broker before the first rental, and get rental coverage in writing. Ask about liability for guest injuries, especially around docks, boats, hot tubs and fire pits, and about damage caused by guests. An undeclared rental can lead to a denied claim. Some licensing bylaws also ask for proof of liability insurance.

Municipal Accommodation Tax

Ontario municipalities are allowed to charge a Municipal Accommodation Tax (MAT) on short stays. Where it applies, you collect it from guests and remit it to the municipality or its agent.

Huntsville and Gravenhurst each charge 4% on stays of less than 30 days. Townships in Haliburton County have also adopted a MAT. The rate and start date are set by each municipality, so confirm them locally.

Income tax on rental income

Rental income is taxable and must be reported on your tax return each year. You can deduct reasonable expenses for the rental, such as cleaning, platform fees, advertising and a share of insurance, utilities, property tax and mortgage interest.

If you also use the cottage yourself, you can only deduct the portion of shared costs that relates to the rental period. Keep a calendar of rented days and personal days, and keep receipts. If you provide services well beyond a basic rental, your income may be treated as business income, which is taxed under different rules.

Regular renting can also affect the tax treatment when you sell. Ask an accountant before you start, not after.

The federal rule on non-compliant rentals

Since January 1, 2024, the federal Income Tax Act denies expense deductions for non-compliant short-term rentals. A short-term rental here means a residential property rented, or offered for rent, for periods of less than 90 consecutive days.

A rental is non-compliant if the province or municipality does not allow short-term rentals at that location, or if it requires a registration, licence or permit and you do not have one. The denial is prorated by the number of days the rental was non-compliant.

The effect is harsh. You are taxed on the gross rent for those days, with no expenses to offset it. An unlicensed rental now carries a tax cost on top of any township fine.

HST

Long-term residential rent is exempt from HST. Short-term stays of less than one month are generally taxable.

You do not have to register for and charge HST while you are a small supplier. That means your total taxable revenue is $30,000 or less over four consecutive calendar quarters. The test counts all your taxable business revenue, not only the cottage. Once you pass $30,000, you must register and charge HST, which is 13% in Ontario. If you are not registered, the booking platform generally collects the tax on its bookings.

There is a second HST issue that surprises owners. A cottage used mainly for short-term rentals may stop being treated as an exempt residential property. HST could then apply when you sell it, or when you change it back to personal use. This area is technical. Get advice before you rent heavily.

How to check before you buy

1. Read the township's short-term rental page and bylaw. Confirm the zoning of the exact lot allows rentals.
2. Ask if licences are capped or wait-listed. Also ask if there is a waiting period for new owners.
3. Do not assume the seller's licence transfers. Licences are often non-transferable, and a new owner has to apply from scratch.
4. Get the septic permit. Work out the legal occupancy from it.
5. Ask the seller for rental records. Request the licence, the booking history and proof that accommodation tax was remitted.
6. Check private restrictions. A road association, a condominium or a restrictive covenant on title can ban rentals even where the township allows them.
7. Get an insurance quote for rental use.
8. Tell your lender. Insured second-home mortgage programs generally do not allow rental properties. See how to finance a cottage.

Run your numbers twice, once with rental income and once without. If the cottage only works with full summer bookings, a single bylaw change can undo the plan. Our calculators can help with the carrying costs.

This is general information, not legal or tax advice. Confirm the bylaw with the municipality and the tax treatment with an accountant.