In a recent policy shift, the Canadian government has introduced tax measures targeting short-term rentals, as detailed in its 2023 fall Economic Statement. This move aims to address the growing rental housing shortage across the country. Effective January 1, 2024, these new rules will deny income tax deductions for expenses related to short-term rental income, including interest expenses, in areas where such rentals are prohibited.
This policy change, aimed at easing the rental housing crisis, particularly targets properties listed on platforms like Airbnb and VRBO. In major cities like Montréal, Toronto, and Vancouver, approximately 18,900 homes were utilized as short-term rentals in 2020, a figure that is believed to have risen since. Despite Airbnb reporting a decline in listings in Toronto and Montréal since 2020, the overall impact of short-term rentals on housing availability remains a concern to many.
The government's decision reflects a broader trend, with countries like Australia and Italy implementing similar restrictions. These measures represent a response to the imbalance in housing supply and demand, further exacerbated by Canada's immigration-driven population growth and the housing market surge during the COVID-19 pandemic.
Federal and Municipal Government Initiatives
The Canadian government also plans to allocate $50 million over three years, starting in 2024, to support municipal enforcement of these new restrictions. This funding is intended to aid municipalities in effectively managing and reducing the number of short-term rentals, thereby increasing the availability of long-term housing.
Critics, however, such as Gabriel Giguère from the Montreal Economic Institute, told Reuters that these tax changes are insufficient in addressing the root cause of Canada's housing shortage, emphasizing the need for a significant increase in housing supply.
Nathan Rotman, Airbnb’s policy lead for Canada, also told Reuters that “home-sharing regulations are not the solution to Canada’s housing crisis.”
“The reality is the majority of Airbnb Hosts in Canada share one home to supplement their income and listings represent less than 1% of the country's housing stock," he said.
"Many Canadians earn extra income through home sharing to make ends meet at a time of increasing inflation, interest rates and cost of living."
Provincial and municipal governments have also taken steps to regulate the short-term rental market. British Columbia, for example, requires hosts to register with the province and has imposed stricter rules and fines for non-compliance. Internationally, similar measures are being adopted, with cities like Florence, Italy, banning new short-term rentals and Byron Bay, Australia, limiting the availability of properties for short-term holiday stays.
Case Studies and Legislation in British Columbia
The federal government's decision to restrict tax deductions for non-compliant short-term rentals and support municipal enforcement initiatives is seen as a step toward making more homes available for Canadians. This approach is also part of a broader strategy to gather data on short-term rentals to inform future housing policies.
A case study highlighted in the economic statement illustrates the impact of these measures. An investor in Montréal, owning three condos and earning substantial income from short-term rentals, will no longer be able to deduct expenses due to non-compliance with local regulations. This change is expected to provide a strong incentive for operators to convert their properties back to long-term rentals, presumably, by the government’s analysis, contributing to the availability of housing for Canadians.
In British Columbia, the government’s recent legislation to regulate the short-term rental market, led by Premier David Eby, has also raised questions about its impact and efficacy.
The law aims to transform short-term rentals into long-term homes, a response to the rising number of short-term rental listings in BC, which has surged to approximately 28,000 active listings as of last month, according to the province. That’s a 20% increase from last year.
Housing Minister Ravi Kahlon highlighted perceived challenges created by the short-term rental market, especially by operators with multiple listings, which critics argue could be more about curbing profit-driven activities than addressing housing affordability.
The legislation includes measures such as increasing fines, requiring rental platforms to share data, and limiting short-term rentals to principal residences in larger municipalities.
In British Columbia, at least 30 municipalities, including Vancouver, Victoria, and Kelowna, have implemented bylaws and licence fees to regulate short-term rentals. Despite these efforts, challenges in enforcement persist. Vancouver reports more than 30% of hosts operating illegally, Victoria struggles with around 1,600 hosts exploiting legal loopholes, and Kelowna has seen a significant 89% increase in licenced short-term rentals since 2020. Further complicating matters, data indicates high rates of non-compliance across the province, with an estimated 40-50% of short-term rental listings flouting regulations in 2023.
The legislation will tighten control over short-term rentals, with increased fines for local governments up to $3,000 per infraction per day and regional districts up to $50,000. Rental platforms are now required to share host data for enforcement and tax auditing purposes and must promptly remove unlicensed listings. The law also mandates that short-term rentals in larger municipalities be limited to hosts' principal residences, with some exemptions for smaller communities and resort areas. Additionally, a provincial host and platform registry will be established by late 2024, complemented by a dedicated enforcement unit to ensure compliance.
The proposed legislation and accompanying regulations will be implemented in a phased-in approach.
The principal residence requirement for short-term rentals will apply to communities with a population over 10,000 and those within 15 kilometres of such municipalities. Communities with a vacancy rate above 3%, as per the latest CMHC data, may seek exemptions from this rule. Additionally, currently exempt communities have the option to opt into this requirement if local governments so decide.
Municipal leaders have expressed varied reactions. Victoria Mayor Marianne Alto sees the legislation as a support for municipal efforts, while Vancouver Mayor Ken Sim focuses on the need for more robust enforcement. Kelowna Mayor Tom Dyas and Tofino Mayor Dan Law also support the initiative.
David Wachsmuth, Canada Research Chair in urban governance at McGill University praised the policy and called on the rest of the country to emulate it.
“These are sensible, evidence-based rules that are going to prioritize the needs of BC residents and get rental housing back on the long-term market where it belongs,” said Wachsmuth.
Eby’s new legislation relies significantly on new research by the school of urban planning at McGill.
This research, however, was commissioned and funded by the British Columbia Hotel Association, which the premier did not mention.
Scams and Fraudulent Activities in Short-Term Rentals
British Columbia's Housing Minister Ravi Kahlon is alerting the public about scams involving short-term rentals, as the province tightens regulations to boost housing availability. Kahlon highlighted a case where a Vancouver short-term rental company, Cycer Investments, offered $500 to individuals willing to fraudulently change their driver's licence address to circumvent upcoming bylaws. These new rules, effective May 1, 2024, restrict short-term rentals like Airbnb to properties where the host is a principal resident.
Kahlon cautioned against participating in such schemes, emphasizing the legal risks and the ease with which the new regulations can detect fraud. The minister noted the seriousness of offering payment for altering official documents, warning of potential legal consequences for those involved. He also mentioned plans to contact the company behind the scheme.
The original advertisem*nt on Craigslist has been removed, and Cycer Investments' website was inaccessible. Kahlon's warning comes in response to concerns from local governments about widespread circumvention of existing rules, which the new regulations aim to address more effectively.
Economic Benefits of Airbnb
Airbnb's economic impact in Canada reflects a mixed bag of benefits and concerns, according to recent data and studies. Hosts across Canada earned an average annual income of about $10,300, according to Airbnb. This supplementary income, vital to many amid rising living costs, has helped nearly half of the hosts with mortgage and essential expenses, the company said.
Guest spending, averaging over $200 per night, primarily benefits local businesses in host communities, supporting sectors like retail and dining. On the fiscal front, Airbnb said it contributed “significantly” to public coffers, remitting over $120 million in taxes within Canada in the first nine months of 2022 alone.
Contrary to some fears, a study by The Conference Board of Canada suggests that Airbnb's presence has not led to a significant increase in rents across major Canadian cities. This analysis, utilizing actual Airbnb booking data, suggests that the rise in rents since 2016 is largely independent of Airbnb's growth, attributing at most a negligible increase to the platform.
The study was completed using funding and data from Airbnb.
Perspective From a Real Estate Expert
Steve Saretsky, a well-known Vancouver-based real estate aficionado, realtor, and investor weighed in on the issue.
Saretsky, whose business is among the top one percent of Greater Vancouver realtors, is the author behind one of Vancouver’s most popular real estate blogs. He also provides advisory services to investment advisors, financial institutions, policymakers, and real estate developers.
Saretsky believes that while platforms like Airbnb should be part of the housing discussion, they aren't the primary issue.
"The real drivers of our housing market challenges lie elsewhere," he said, citing "the abundance of cheap credit, foreign investment, and the chronic underbuilding of housing" as more significant factors.
For Saretsky, Airbnb is more of a "sideshow" in the larger housing market narrative.
"I understand the rationale for wanting to clamp down on it," he explained, "but where do you draw the line, especially when these services are so widely used by vacationers?" He questioned the feasibility of strict regulations in residential zones, where short-term rentals often operate like commercial entities.
Saretsky has been vocal in advising caution to investors eyeing the short-term rental market.
"I've always told my clients that investing in Airbnb properties is risky, given the government's clear opposition," he stated. He highlighted the situation in Vancouver, where many short-term rentals operate illegally, and the government's recent actions are in line with its long-standing stance.
The transition from short-term rentals to long-term housing is, in Saretsky's view, an unlikely outcome of the new regulations.
"The notion that these properties will seamlessly integrate into the long-term rental market is optimistic at best," he remarked. He pointed to the more lucrative nature of short-term rentals and the tenant-friendly tenancy laws as significant barriers to this transition.
Saretsky, a proponent of free-market principles, further criticized the government's heavy involvement in the property market.
"There's been a lot of government intervention, from rent control to speculation taxes, yet the market hasn't become more affordable," he said. This, he believes, could be a distraction from addressing the core issues plaguing the housing market.
Finally, Saretsky expressed concern about the potential impact on tourism, a vital sector for cities like Vancouver. He advocates for a balanced approach that focuses on both the long-term rental market and overall housing supply, rather than imposing restrictive measures on short-term rentals.
"We need to find a softer balance that incentivizes the growth of the housing supply," Saretsky concluded.
