airbnb – Refined Real Estate Team

Do Airbnb and short-term rentals still make financial sense?

Jeffrey Luciano — Fri, 01 Nov 2024 20:48:57 +0000

When short-term rental platforms like Airbnb and VRBO first arrived in Ontario in 2009, they offered a new option to home owners or investors who were interested in making money off properties. By competing against hotels and offering short-term rentals, property owners could realize significantly higher rental income than they could by renting out the home or unit to a long-term tenant.

During the initial heyday of these platforms, most municipalities didn’t have restrictions on short-term rentals. It took a while for the platforms to grow in popularity and for municipalities to begin to see some problems as a result of the change.

In Toronto, it wasn’t until early 2018 that City Council approved the regulation of short-term rentals in Toronto. Up until that point, short-term rentals existed in a bit of a gray zone and we saw pure income properties being rented short-term as well as some principal residences.

The initial regulations in Toronto were appealed to the Local Planning Appeal Tribunal (LPAT) and as such did not go into force. The hearing for the appeal took place in August, 2019, and the City eventually received a positive decision at the LPAT, so it wasn’t until November, 2019 that the short-term rental regulations came into effect.

Over time, the rules, fees and taxes that apply to short-term rentals have increased, and we’ve also recently seen the CRA crack down on the sale of such properties, with significant tax impacts. It’s time for a review of what it costs to register and operate an Airbnb, and what happens when you sell such a property, to see if it is still a good option. Here we go!

The Good Old Days

When Airbnb and other short-term rental platforms arrived in Ontario back in 2009, there were no licensing, fees or specific regulations in place for this type of rental. Cities had largely left the regulation of rentals to the province, with bodies such as the Landlord and Tenant Board and legislation such as the Residential Tenancies Act. Short-term stays were done by hotels and those businesses were established and run by corporations, rather than individuals who had a home they didn’t stay in all year round.

The Times, They Are A Changing

By late 2019, rules for short-term rentals were in place in Toronto, but even now (late 2024) a number of municipalities in the GTA don’t have things set in stone. Whitby, Pickering, Aurora and Newmarket are still working on the regulations, and as such it hosts are really only concerned about following local zoning, property standards, and tax requirements.

The initial rules in Toronto had a Municipal Accommodation Tax (MAT) that was set at 4%. This tax applies to short-term rentals and supports city tourism and infrastructure. Registration fees for owners were a very reasonable $55.

In 2023, Toronto raised the MAT to 6%, ensuring short-term rental operators remit this amount quarterly. To simplify compliance, Airbnb and similar platforms began to offer a remittance option on behalf of hosts.

Beginning in 2025, registration fees are set to increase drastically from around $55 to $375, highlighting a stricter stance against non-compliant operators.

No Investors Allowed

As municipalities created the regulations for short-term rentals, most decided that such rentals would only be permitted in a homeowner’s primary residence. If you were an investor and didn’t live in a home, you could rent it out long-term (more than 28 consecutive days) but short-term rentals were no longer permitted.

This was done due to concerns about housing shortages, as the proliferation of short-term rentals in residential units had begun impacting the long-term rental market.

As of November, 2024, this is the case in Toronto, Mississauga, Oshawa, Oakville and Burlington. Basically, if the municipality has developed regulations, the rule is short-term rentals are only allowed if it is your primary residence.

Wait, what’s that about HST?

In addition to the registration fee and the Municipal Accommodation tax, owners of short-term rentals also need to be aware of HST obligations.

Airbnb rental income becomes subject to the HST if the rentals are for less than 30 consecutive days (one month) and the rent charged is more than $20 a day. Given the cost of stays in Ontario, almost all Airbnb properties charge more than $20 a day, so if you a host is doing significant levels of bookings, HST is charged on the stay, and due to the government. This is in contrast to long-term residential rentals, which are exempt from HST.

While charging and remitting HST can be either neutral or slightly beneficial (as you can claim input tax credits on costs incurred in renting the unit), a much bigger problem exists when the owner of an Airbnb property decides to sell.

In October, 2024, the Tax Court of Canada ruled on a case and held that the sale of a used residential property rented out on Airbnb is subject to HST on the entire sale price. A reminder that resale residential properties (i.e. not a new build where you’re the first buyer) in Ontario don’t have any HST charged on the sale. This is the case even if the property was an income property and rented out on long-term basis – but not if it is being used for short-term rentals.

In the ruling that came down, the judge ruled that at the time the owners sold the property, it was not a tax-exempt residential complex, since for tax purposes it was similar to a hotel, motel, inn, boarding house or lodging house. All of the condominium leases for the 14 months before the sale were for periods of continuous possession of less than 60 days, i.e, short-term rentals.

As a result of the “commercial rental operation” during that time, the entire sale price of the condominium was not exempt from HST. This means that if you own and operate a property as a short-term rental, you can expect that the CRA will treat the sale of that property as one that should charge and remit HST. The exact amount of HST owing would require a tax specialist to determine, but it is obviously significant dollars given the 13% HST rate.

If the seller doesn’t realize that HST should be charged, and doesn’t include wording in their Agreement of Purchase and Sale related to the sale price being plus HST (rather than inclusive of HST), they will be out of pocket for the HST that should have been charged. Even if the seller knows this may happen, they face a situation where their property becomes extremely unappealing to buyers who will have to pay HST on the purchase, compared to another property they could buy that wasn’t used for short-term rentals and therefore doesn’t have HST charged on the sale.

In short, the disposition of properties that were used for short-term rentals may result in a significant loss of equity in the home due simply to the HST component that has to be made up for – either by the seller directly to the government, or by the buyer who would demand a reduction in the purchase price.

When an Airbnb host has to pay a registration fee, charge a municipal accommodation tax and charge HST, it is no wonder that the days when Airbnb was a cheaper option than hotels are gone. As prices rise for guests, it seems logical that occupancy levels would be lower and that owners will make less revenue on the unit.

Add in the significant tax hit at the sale of the property and there is a very real question as to whether Airbnbs or other short-term rental options are still financially viable. Long-term rentals may bring in less revenue on the surface, but with significantly lower costs to manage and operate and no HST issues upon selling, the equation has shifted considerably.

If you are considering how to best benefit from a property that you own that you don’t live in full-time, then we’d love to walk you though the options. Get in touch with us and we’ll start the ball rolling!

How exactly does Airbnb work in Toronto?

Jeffrey Luciano — Fri, 10 Feb 2023 21:01:41 +0000

Back in November, 2019, we wrote about the “new” Airbnb rules that were put in place back then in Toronto and three implications of the rules.

The situation has continued to change in the city and we thought it was time we did an updated article on how exactly short-term rentals (and hence Airbnb, VRBO or any other similar platform) function in Toronto.

Let’s review.

First off, what’s short-term?

A short-term rental is classified by the City of Toronto as less than 28 days. If a homeowner is renting out for longer than a consecutive 28 day period, then none of the rules we describe below apply. If, however, there is a single rental that is less than 28 days, the city’s short-term rental rules come into play.

The City’s Stance

The City of Toronto’s official guide to short-term rentals can be found on their website here.

That is the most comprehensive site for all the details, the process, forms and so forth, but let’s review some key points here along with our take on each.

People renting their homes or rooms within their homes for less than 28 days need to register with the City and collect and remit a 4% Municipal Accommodation Tax (MAT) on the rentals. Payments are due on a quarterly basis and if you’re using Airbnb or another rental company, they can collect it on behalf of the owner. There is HST on top of the MAT if you’re registered for an HST number, which you need to do if you think you’ll earn more than $30K per year in short-term rental income. That works out to $85 per day in rental income so if you are renting out your property in the city (or part of it) on a regular basis, it certainly seems likely you’d exceed that $30K a year number.
You are only allowed to short-term rent your principal residence. That’s right, if you own an income property and have another property which is your principal residence, the city says no short-term rentals for you. If you own multiple properties that you want to rent out on a short-term basis, the city says that is impossible, as you can only have one principal residence, and that is the only one you can rent out.
If it is your principal residence, you can do short-term rentals regardless of whether it’s a house, apartment or condo. That’s in the eyes of the city, but remember that many, many condo buildings in the city have their own restrictions prohibiting owners from doing short-term rentals. You could have a condo and it could be your principal residence, but you still might not be able to do short-term rentals. Make sure you check with your property management company or the condo corporation’s rules and regulations or by-laws to see what’s permitted.
The maximum you can rent out your home (or rooms in your home) on a short-term basis is 180 nights per year. This makes sense given it has to be your principal residence, and if you are spending more than half your time living somewhere else, it doesn’t much seem like the property you’re renting out is in fact your principal residence.
If you have a secondary suite such as a basement apartment, or a laneway suite, you can do short-term rentals, but again only as long as the suite is your principal residence. To be clear, if you live in a house, you can’t short-term rent out your basement unit or laneway suite, at least not legally in the eyes of the city. The same logic applies to bigger multi-unit homes like duplex, triplex and so forth. Owners can only short-term rent their principal residence (i.e. the unit or portion of the property they occupy) and not the other units in the building.

Airbnb’s Interpretation

Given the somewhat complex nature of the rules around short-term rentals in Toronto, it’s no surprise that Airbnb has written up their own guide. You can find it here.

While most of what is said by Airbnb is just a slightly more user-friendly (or host focused) version of what the city says on their site, they do highlight a few other aspects that aren’t as clear on the city’s site.

While the city is primarily focused on owners wishing to rent out their properties on a short-term basis, there is also the ability for tenants to do it. The same rules apply, wherein the tenant has to have the home as their principal residence, and tenants also need to make sure that they are in compliance with their lease agreement and the Residential Tenancies Act.
The 180 nights per year maximum for short-term rentals is clarified by Airbnb to not apply if you’re not renting your entire home. If you have bedrooms in your home you’re renting (up to a maximum of three bedrooms) you can rent them out on a short-term basis for as many nights in a year as you want.

Our Thoughts

The decision to restrict short-term rentals to principal residences only is clearly an attempt to prevent the creation of a completely separate hotelling situation in the city. It is a compromise model that allows snowbirds and other homeowners who spend some (but not more than half the year) away from their home, to put their homes onto the short-term rental market.

It’s unclear how stringent the city is in their enforcement of these rules. There are some media stories about the city issuing takedown notices for short-term rental listings that exceed the 180 days per year limit, but the shadowy side of investors claiming the home is the principal residence may not yet be targeted. Operating without a short-term operator license can result in a fine of $1,000 and up to $100,000 if the operator is convicted in court, but that would only be for individuals who don’t use the Airbnb or another site who require the license to be in place.

If you’re considering buying a property in Toronto for the purposes of renting it out on either a short or long-term basis, it pays to work with agents who understand the rules. If that sounds appealing, don’t hesitate to get in touch with us so that we can help you make a wise investment.

Nice income property. What you gonna do with it?

Jeffrey Luciano — Mon, 03 Jun 2019 15:51:55 +0000

It’s an interesting question for investors to consider. While investors have traditionally been about long-term rentals with tenants paying down the mortgage over time, the rise of short-term rental platforms like Airbnb and VRBO provide another option. Most municipalities define short-term rentals as less than 28 days and they are often for a period of a day or week.

Let’s look at the three questions that need to be answered

What sort of renter does the property appeal to?

This is a pretty basic question but it’s surprising how often it isn’t asked by investors.

By their nature, Airbnbs are for people who are not living in an area, but rather visiting it.

When you look at the reasons why people visit an area for a short amount of time, it is typically either for a business trip or for a leisure activity.

Business trips mean that the visitor is looking to be located near central business districts. While you will have the occasional visitor from out of town who is conducting business at a factory well outside of the downtown core, Airbnbs work best where you can appeal to a broad market of business travellers and the central business district is where they want to be located.

If the visitor is in town for a leisure activity, they again want to be located close to the purpose of their visit. Properties near sports stadiums, concern venues, amusement parks and so on tend to be very attractive to leisure visitors.

In contrast, people who are looking to live in an area are less focused on close proximity to the central business district or visitor attractions. Whether it is a student looking to live near a university, an employee looking to live near their work or some other situation, there are many cases where properties located far from the central business district or visitor attractions can be lucrative long-term rental properties.

For every property you own or are consider buying, look at the location of the property and what sort of tenant it would appeal to most. If it’s close to the central business district or some major tourist attractions, Airbnb could be a great option. If it’s not close to those areas but has good proximity to schools and transit connections, it will likely be a good long-term rental.

Do you want an active or passive investment?

The second question we need to answer is less about more about if it makes a good short-term or long-term rental and more about if you make a good short-term landlord.

One of the most attractive aspects about income properties is that apart from an initial acquisition period and tenant turnover periods, they can be a passive investment. By their very nature, short-term rentals have more uncertainty than a long-term rental and a higher risk of vacancies during the course of the year.

The right property in the right location with the right tenants can see years of equity growth through market appreciation and the tenant paying down the mortgage with their monthly rent payments.

Whenever you’re considering running an Airbnb or other short-term rental model, you need to think about the level of involvement you want with your investments. While no direct property investment is totally hands-off, a long-term rental is the closest to that model.

In contrast, Airbnbs requires you as the operator to:

Sign up with a marketing platform (such as VRBO.com or Airbnb)
Respond to enquires about the property
Establish methods by which guests access the property
Answer questions that guests have during their stay
Respond to any issues or problems during their stay
Clean and restock provided consumables, cutlery, linen, etc.
Pay recurring fees for each customer to the marketing platform

Regardless of whether short-term rentals can result in a higher return on your investment, the question that needs to be answered is whether you want to take such a hands-on role with your investment property.

It is of course possible to hire someone to handle some of the work overseeing a short-term rental but it needs to be at a rate that means it is still a more lucrative investment than a long-term rental. In the end, it boils down to whether you want to actively engage with guests in your income property or if you would prefer to have it reduced to occasional contact throughout the year.

Is it permitted in the building or community?

As a new model in the rental industry, short-term rentals like Airbnb are facing opposition from housing types and even communities that weren’t designed with it in mind.

The vast majority of condominium apartments now have regulations in force prohibiting Airbnbs and other short-term rentals. This is because these buildings were not designed for daily or regular turnover of residents and all the activity that comes with it.

Elevators were not designed for a significant portion of the building residents entering and exiting with luggage each day.
Security personnel were not staffed at levels to accommodate regular groups of visiting tourists who may not have the same work hours as residents.
Building infrastructure was not designed for high daily use of in-suite items such as washing machines, dryers and dishwashers when guests come and go.
The safety and security of the building and the residents can be compromised by systems put in place by short-term rental operators to allow their guests to gain access to the building and the rental units.

At the heart of it is the fact that condominiums are designed around long-term residents who understand the rules and regulations of the building, which are in turn written with expected patterns of behaviour based on people living and working in the community.

Given this situation, it is quite rare to find a condominium apartment that permits Airbnbs. There are large fines that can be levied against home owners who decide to operate a short-term rental in violation of these rules. Given the public facing nature of the enterprise, it is often quite easy for condominium buildings to monitor if any suite owners are in violation of the rules.

In addition to the difficulty in finding a condominium building where it is permitted to run short-term rentals, communities often face pressure from residents to restrict or license such endeavours.

Within the City of Toronto, short-term rentals are currently not permitted. That’s correct, regardless of whether it is within a condominium building or not, as it stands right now, within the City of Toronto, you are not allowed to use a property for the purpose of short-term rental.

In early 2018, Toronto City Council approved the regulation of short-term rentals in Toronto, which would require short-term rental companies to obtain a licence and short-term rental operators to register with the City and pay a Municipal Accommodation Tax (MAT) of 4 per cent.

This amendment has been appealed by the Local Planning Appeal Tribunal (LPAT) and as such they are not yet in force. This means that the status quo remains the same and short-term rentals are not permitted in Toronto.

The hearing for the appeal will take place in August, 2019, and if the City receives a positive decision at the LPAT, the short-term rental regulations will come into effect. Soon after, individuals will be given a period of time to submit applications for a licence or registration and the 4 per cent tax will be implemented.

If you want to read all the details, you can find them here.

Without question there are people doing short-term rentals in Toronto now, so like many by-law issues, the real issue becomes how aggressively it is enforced and the fines that are applied against violations. The rule against short-term rental was scheduled to be enforced beginning July 2018, but with the appeal as described above, it means that restrictions on short-term rentals are not currently being enforced.

A careful review of the current legality of short-term rentals is an important aspect of the purchase decision for an income property. It doesn’t matter if it’s in a great location for an Airbnb and you’re willing to do the work to oversee the unit if you can’t legally rent it out!

If you’re considering an income property, it’s important to work with a Realtor who understands the current options for short and long-term rentals and can help advise as to which would be the best option for you, for the property and for the future.