Meet Sarah, a property owner who ventured into the short-term rental business around 2015. In just three years, Sara has amassed an impressive portfolio of 13 AirBnB condos in Toronto and Montreal. In 2018, Sara was able to quit her full-time job to focus on growing and managing her short-term rental portfolio.
Sarah isn't alone. For many Canadians, the last few years were a golden era for short-term rentals. The popularity of short-term rentals skyrocketed during the pandemic and continues to thrive as an alternative options to hotels. Between 2015 and 2018, private short-term rental property owners in Canada saw a staggering tenfold increase in revenue, reaching $2.2 billion, as reported by Statistics Canada.
Fast forward to 2023, and the short-term rental landscape has transformed. Government regulations, including residency mandates, have become more stringent, casting a shadow on the once-thriving industry. Concurrently, the financial dynamics have shifted, with higher interest rates adding a layer of complexity. Sarah now finds herself recalibrating her approach, adapting to the evolving challenges in a market that was once an unparalleled source of income for property owners like her. However, Sarah's challenges as a short-term rental owner, are just beginning.
In an upcoming fiscal update, the Canadian government, under the leadership of Finance Minister Chrystia Freeland, is set to implement a strategic measure that could reshape the dynamics of the country's housing market. The focus of this initiative is on short-term rentals, specifically targeting property owners in areas with existing short-term rental restrictions.
One key aspect of the upcoming changes that are proposed as of January, 2024, is a measure that affects property owners in regions with limitations on short-term rentals. Going forward, these owners won't be able to claim rental expenses against their income, a move designed to eliminate financial incentives for flouting local regulations and listing properties on platforms like Airbnb. To simplify, despite increasing mortgage costs, Sarah still has a chance at making things work when she files her taxes. Today, the Canada Revenue Agency permits property investors like Sarah to write off their rental expenses.
These expenses, such as property maintenance, utilities, and advertising costs, off-set Sarah's rental income, so that she only pays income taxes on the profits she generates from her short-term rental portfolio.
The proposed plan can be the final nail in the coffin for Sarah and many other short-term rental investors. If investors have to pay full taxes on their rental income and aren't able to write off their expenses, the already-challenged economics behind short-term rentals will go the way of the dinosaur.
Why restrict short-term rentals?
As Canada grapples with a housing supply crisis, the federal government recognizes the need for a multifaceted approach. The urgency stems from a September announcement by the Canada Mortgage and Housing Corporation, stating that at least 3.5 million units must be added within the next decade for homes to become more affordable.
The final nail in the coffin: what will change for short-term rental owners?
One key aspect of the upcoming changes is a measure that affects property owners in regions with limitations on short-term rentals. Going forward, these owners won't be able to claim rental expenses against their income, a move designed to eliminate financial incentives for flouting local regulations and listing properties on platforms like Airbnb.
The government believes that altering the financial equation surrounding short-term rentals will contribute to a more sustainable housing market. By removing certain financial benefits, the hope is that property owners will be less inclined to bypass local restrictions, fostering a more regulated and stable housing environment.
How will it work with Municipal regulations on short-term rentals?
Recognizing the diverse landscape of property regulations across provinces and cities, the government aims to use this federal approach as a nudge for more municipalities to adopt similar restrictions. The new tax measure is slated to take effect on January 1, 2024, giving stakeholders time to adjust to the changes.
As the Canadian government addresses the complex challenge of housing affordability, the changes to short-term rentals underscore some fundamental changes that may see short-term rentals disappear in the name of increasing the inventory of available properties to Canadian end-users.