There was an interesting report published recently by the Canadian Centre for Policy Alternatives (CCPA) on the growing Airbnb market in Toronto and whether it needs to be regulated in some form. I have always been interested in this notion and specifically what the impact of the Airbnb market is on Toronto’s property tax regime.
The CCPA report provides some regulatory considerations of Airbnb with examples from major cities in the US. See below-
New York and Chicago’s response to Airbnb is very interesting (and a little too onerous I think). As well, Vancouver has recently considered introducing some form of regulation to get a handle on the growing Airbnb market.
Should Toronto regulate Airbnb? And how?
I believe there is merit in regulating Airbnb in Toronto, but it should not be too onerous to discourage it. The following example shows a possible method of regulation via property taxes in Toronto.
The image below shows City of Toronto’s property tax rates for 2015.
The residential property tax rate is roughly 0.7%, while the commercial property tax rate ranges from about 2.5% to 2.7%. Homes for living fall under the residential category and homeowners pay the residential property tax rate. Owners of commercial properties like retail stores, office buildings, hotels, home-based businesses, etc., pay the commercial tax rate. Clearly, commercial (and industrial) property owners in the City of Toronto pay a much higher property tax to the City than residential property owners. This is done for a variety of reasons and the City has been over time reducing the commercial property tax rate to appeal more to businesses.
Below is a quick calculation showing the difference in property tax paid between a commercial and residential property owner –
- A hotel property owner whose hotel is worth $1,o00,000, will pay an annual property tax of about $25,111 ( $1,000,000 x 2.5111% = $25,111)
- A home owner whose home is worth $1,000,000, will pay an annual property tax of about $7,056 ($1,000,000 x 0.7056% = $7,056)
The residential home owner pays 3.5 times less than the hotel owner in property taxes. If the residential home owner decides to make an extra buck by listing and successfully leasing their property on Airbnb , they only have to declare the income generated from it, but not pay the appropriate property tax rate for effectively functioning like a business for a certain period of time.
Why is this important?
This is important because the City of Toronto (like most municipalities in Ontario) generates a big chunk of its revenue from its property tax base, as shown in the image below (link to image here). And the City needs as much revenue (whether from its tax base or in the form of other revenue sources) as it can generate in order to run effectively, provide needed/desires services and be financially sustainable.
The question is, should a residential homeowner who lists their property on Airbnb pay the same property tax rate as the owner of a hotel property?
I don’t believe the same property tax rate should apply because a hotel is a business, whereas Airbnb is a “grey area” at the moment. However, I definitely believe there should be some regulation of Airbnb (whether in the form of additional fees/taxes, a license to operate, rules who can list properties, etc.). The disproportionate fees/taxes paid by Airbnb hosts, relative to hotel property owners is likely one of the reasons Airbnb can be so lucrative.
Personally, I am a huge supporter of innovative and disruptive companies like Uber and Airbnb , and I use both. Although not without flaws, there is much to be said about the tremendous benefits both provide, and I believe it would be a grave mistake to outlaw or over-regulate Airbnb in Toronto. These are new technologies that we should embrace, and we need to regulate them a manner that mutual benefits us all. For example, regulating Airbnb in the form of additional levies or fees, or via licensing could help Toronto generate additional revenue to help with its budget. And if I have to pay a bit more to host or use an Airbnb, I am completely OK with it so long as it goes to making my city a better place to live, work and play in.