The Tipping Point: Regulation of Toronto’s Airbnb Market

Launched in 2008, Airbnb began as a simple platform with a few hundred users that offered alternative short-term rentals to travellers. Today, Airbnb has an estimated value of $31 billion dollars, more than 150 million users, and is utilized in nearly 200 countries with millions of listings. Airbnb has become the leading single source of accommodation seeking with a reputation as an accessible, flexible cost-effective and user-friendly tool. The growth of Airbnb is unprecedented and has left major cities unprepared for the wider impact of this pronounced symbol of a sharing economy.

Calls to regulate the use of Airbnb and other similar platforms have proliferated across major North American cities. While several US jurisdictions have already exercised regulatory control over short-term leasing, Canada seems much more hesitant than its American counterparts to take similar action. However, the tide may be shifting as Canadian cities face mounting public pressure to regulate short-term rentals.   Many groups view Airbnb as threatening long-term rental space, changing the composition of neighbourhoods and providing unfair competition to the hotel industry.

American Regulation

American tourist hubs have led the charge in placing parameters on the ability of users to advertise short-term rentals on sites like Airbnb. In 2010, New York State amended its Multiple Dwelling Law (MDL) to make it illegal to rent out an entire apartment (unhosted rentals) on Airbnb for less than thirty days. This law was passed, among other reasons, to address concerns that Airbnb listings had the effect of limiting the availability of long-term rentals. It is also illegal in New York to advertise a short-term rental prohibited by the MDL, with violators facing penalties ranging from $1,000 to $7,500. In San Francisco, strict guidelines on Airbnb hosts include the requirement that hosts live in the unit for at least 275 days out of the year; unhosted units cannot be rented out for more than ninety days out of a year. Importantly, short-term rental hosts are required to obtain a permit, a business license, and pay bi-annual fees. Hosts are also required to purchase liability insurance for their hosting activities and charge renters a 14% “Transient Occupancy Tax,” payable to the city.

Canada Following Suit?

Municipal governments across Canada are feeling the pressure to address the alleged negative impact of short-term rentals via platforms like Airbnb. For example, the City of Vancouver has proposed licensing short-term rentals of less than thirty days, but only for houses declared as primary residences. Only homeowners that dwell in the home can operate a short-term rental arrangement. Plans have moved forward to bring this regulation into effect in 2017.

On April 15, 2016, the Province of Québec became the first Canadian jurisdiction to officially regulate short-term rentals. Anyone renting out a property for no more than 31 days on a regular basis must secure a license similar to a hotel and charge renters up to 3.5% in taxes.  The Québec short-term rental regulation excludes from licensing requirements properties rented on an “occasional basis” but does not define what the term means. Presumably, this was done to avoid licensing for owners who, for example, rent out their cottage for a week in the summer. Violators of the law can be fined anywhere from $500 to $50,000.

Toronto Regulation

Toronto, the most populous Canadian city and key tourism destination, has remained relatively silent on regulation initiatives until recently. Toronto’s short-term rental operators have been thriving in a regulatory grey zone, with short-term rentals lacking a definition. The landlord-tenant relationship in the Province of Ontario is regulated by the Residential Tenancies Act (RTA). Traditional businesses that provide short-term rentals are also regulated by multiple provincial statutes. The City of Toronto (the City) does not regulate or register any such commercial properties. However, the kinds of uses of Toronto properties are regulated by a lengthy City of Toronto Zoning By-law, known as Zoning By-Law 569-2013.

Although Zoning By-Law 569-2013 does not cover short-term rentals, it defines a “tourist home” as a dwelling that a) is the principal residence of the tourist home operator; b) caters to the needs of the travelling public by the furnishing of sleeping accommodation; and c) may include the provision of meals (Chapter 800, 860). A tourist home is generally allowed in most residential areas of Toronto, provided that it is in a detached house, a semi-detached house, or a townhouse where vehicle access does not rely on a mutual driveway. Notably, the definition of a “tourist home” does not include situations where a unit owner does not live in the unit. Such kinds of short-term rentals could fall under the definition “hotel.” Hotels are only permitted in employment-industrial zones and mixed-use commercial-residential zones. Therefore, unhosted Airbnb listings could currently fall under the definition of hotels and, as such, would only be permitted in mixed-use zones.

Considering the lack of regulation, it is no surprise that Toronto has started a process of community consultations on the challenges posed by short-term rentals. A final report with recommendations on possible changes to zoning by-laws is due in June 2017. At this stage of the process, the City has identified several areas of inquiry. These areas include looking at the impact of short-term rentals on affordable housing availability, neighbourhoods, development and tourism, zoning by-laws, and taxation. In 2016, the City released a  Developing an Approach to Regulating Short-term Rentals report, which outlined some strategies for regulation, including: a licensing system for operators, an update in zoning by-laws, and additional tax requirements.

Rental Availability

The City’s report implies that regulation of the short-term rental market is an important part of a larger strategy to address the severe shortage of housing in Toronto. Ironically, however, another pressing provincial initiative may undercut the critical goal of increasing long-term rental vacancy rates. In April of this year, Ontario’s government introduced new legislation entitled the Rental Fairness Act, 2017 which amends the current RTA. The new amendments include requirements such as a landlord compensating a tenant one month’s rent, or offering them a new unit if the landlord evicts the tenant for the landlord’s own use.

Landlord associations are upset with the proposed amendments, which they perceive as further strengthening tenant rights above those of the landlord. A common refrain is that the limits on landlords’ autonomy will deter them from continuing to rent out units. As a result, the amendments may lead to landlords seeking out short-term renters to avoid the regulations under the RTA.  In other words, while proposed municipal regulations of the short-term rental market are partly developed with the intention of increasing long-term rental unit availability, the concurrent provincial law amendments may lead landlords to move away from long-term and toward short-term renting—driving down the already low vacancy rate of long-term rental units.

The statistics used to justify short-term rental regulation draw only a tenuous link between the use of Airbnb and the multi-faceted problem of housing in Toronto. Toronto’s move to regulate the Airbnb industry could be construed as an attempt to offload very real housing issues onto private home owners. This is not an adequate solution. The question then becomes whether the move to regulate the use of entities such as Airbnb is truly about long-term rental shortages, property values, broader changes to a community, or generating revenue.

Money Talks

Another important motivation for the regulation of the short-term rental industry is Toronto’s chronic cash shortfall. Toronto collects property taxes based on the predominant use of a property. Hotels and motels pay commercial taxes while bed-and-breakfasts pay residential taxes. Currently, the City of Toronto Act prohibits the City from levying a lodging or hotel tax. In the midst of a severe cash shortfall, the City requested the provincial government to provide it with the authority to implement a hotel tax as a means of raising revenue. This power was granted to the City through amendments in the 2017 Provincial Budget which are likely to pass by summer 2017. Coupled with the release of a final report on short-term rentals which indicated tax implementation as one of the areas to be pursued, the City is likely to implement a sliding scale tax on hotels, bed-and-breakfasts, and short-term rentals.

It is unclear what the difference in tax rates will be. A compromise that appeases the hotel industry, which along with unionized hotel workers are vocal proponents of short-term rental regulation, could include a lower tax rate for hotels coupled with higher tax for short-term rentals. The City could also specifically target unhosted short-term rentals with an even higher tax rate. This way, a proper home-sharing short-term rental could be taxed less than an unhosted short-term rental.

Forward-Looking Solutions

Toronto has reached a tipping point in tackling housing shortages, dealing with budgetary shortfalls, and managing public expectations that have converged with the emergence of the short-term rental market. Regulation is on the horizon, but a good approach would keep the following considerations in mind. First, complaints of noise and the changing composition of neighbourhoods as a result of frequent short-term renting could be managed by taxing unhosted rentals as a business. In addition, regulation should require licensing of hosts to mirror what the City is doing with long-term landlords. Second, concerns about the lack of revenue can be addressed by implementing hotel and Airbnb taxes. This new revenue source could be earmarked for injection into the Toronto Community Housing Corporation, which provides affordable rental units and for which there is a current ten-year wait list.  Finally, the interplay of short-term and long-term rental unit availability is fundamentally a cash flow problem. The Province of Ontario must partner with the City to allow for proper long-term rental unit creation.