Airbnb changed the game
Now it's time they play by the rules
Airbnb was founded in 2008 to advertise a cheap place to stay in San Francisco: on a blow-up mattress in the living room of the founders’ apartment. Since then, Airbnb has grown to become the world’s largest hospitality service, with annual revenues exceeding $2.6 billion and more than 100,000 units available for rent in Canada alone.
Like Uber, Airbnb has become synonymous with the part-time “sharing economy.” What is less well known about Airbnb, according to a recent study by CBRE Group, is that only one in four Airbnb hosts in Canada actually shares his or her home. The rest, who earned $461 million in revenue over the 12-month period ending March 2017, are in fact operating shadow hotels.
What is a Shadow Hotel?
shadow hotel
noun
a) An illegal short-term rental, listed on sites such as Airbnb, in breach of local laws designed to limit hotel-style stays in residential buildings.
b) A residential property operating like a lodging business that evades regulatory oversight, including fire, health and safety inspections, while avoiding taxes and other costs of doing business by using platforms originally intended to facilitate home sharing.
Examples: an Airbnb unit that is rented out for more than 90 days per year; an Airbnb host that rents out multiple entire-home units on a regular basis.
How Canadians feel about Airbnb
Only 1% of Canadians believe that Airbnb has a positive impact on their neighbourhood quality of life, according to a new study conducted by Nanos Research, while nearly two thirds of Canadians say they would be at least somewhat concerned about a neighbouring home being regularly rented on Airbnb. These concerns were found to be more pronounced among residents of Ontario and British Columbia, where a greater number of residential homes have already been transformed into permanent Airbnbs.
The reasons Canadians cited most frequently for why they would not want a neighbouring home to become a short-term rental property include concerns over crime and safety (50%) and overall quality of life (57%). In addition, nearly half of Canadians say that the presence of Airbnbs in their community would hurt home values, while 28% say an increase in short-term rentals would make neighbourhoods less affordable for long-term renters.
While 24% of Canadians say they would object to a neighbouring home ever being rented out over Airbnb—even for just one night— half of Canadians think short-term rentals should be rented out no more than 30 days a year. However, half of Canadians also say that after 20 nights, a short-term rental would start being a business.
Canada's Airbnb industry by the numbers
More than 32,000 Canadian Airbnbs were rented out for more than 90 days during the 12-month period ending March 2017, generating $395 million in revenue. And while only 5,000 of them were occupied for more than 180 days per year, these highly active shadow hotels generated $108 million over that same period.
The use of Airbnb to operate shadow hotels is even more glaring in the case of hosts who rent out multiple properties through the platform. While only 7% of Canada’s Airbnb hosts rent out multiple entire-home units in a single month, they control 30% of the Canadian market and generate more than $167 million in revenue per year.
Critically, multi-property, entire-home shadow hotel operators are also the fastest-growing type of Airbnb host in Canada, with revenues for this group increasing by 134% between mid-2015 and mid-2017. Moreover, the units these businesses rent out tend to be located in residential parts of Vancouver, Toronto and Montreal—especially in areas close to public transit and other amenities—where the availability of affordable housing is already increasingly scarce.
Tax avoidance, loopholes and dodges
Airbnb pays no corporate tax in Canada, despite charging 3-20% in service fees on more than a billion dollars in lifetime transactions for facilitating the short-term rental of Canadian properties. In addition, Airbnb does not collect and remit sales tax on its service fees. This is because Airbnb exploits a loophole (found in a pre-digital tax policy meant to support the manufacturing sector) to argue that it does no business in Canada because it has no stores or offices here.
Airbnb also does not collect and remit sales tax on the transactions themselves, instead leaving it up to hosts to register with the Canada Revenue Agency and fully disclose their earnings. Currently, there is a patchwork system across the country when it comes to provincial and municipal taxes and fees. In British Columbia, Airbnb has agreed to collect and remit PST and a tourism fee that are expected to generate $16 million per year in additional revenue for the province and $5 million more for municipalities. Municipal accommodation tax agreements have been finalized in just a handful of communities.
And while it’s true that Canadian Airbnb operations generating more than $30,000 in revenue per year are already required by law to pay sales tax, even the most forthright shadow hotels still benefit from a separate tax loophole. By using Airbnb to present unregistered commercial operations as “home sharing,” shadow hotels are able to conduct business on residential property, which is taxed on average at 35% of the commercial rate.
Introducing a modern regulatory framework
Adapting Canada’s laws and policies to ensure that Airbnb is fairly taxed and regulated is a big task. But it’s not impossible—dozens of governments around the world, including the European Union, have forced Airbnb to pay its fair share. And it’s also one Canadians support: 40% of Canadians polled by Nanos Research say they would be more likely to vote for a local politician whose platform included increased oversight of Airbnb and other similar platforms (while only 14% say they would be less likely to support a politician with that agenda).
A modern framework for regulating the short-term rental industry in Canada based on what’s worked elsewhere in the world
Host registration and fees
Requires that any property offered for home-renting be registered with the local government. For the benefit of hosts and municipalities, platform companies should facilitate the registration process. Along with the collection of an annual fee to recover costs, registration enables the monitoring and reporting of rental activity.
Platform registration and fees
Require registration of the rental platform companies along with a significant annual fee and an ongoing fee for each booking. Rental platform companies must be prohibited from listing any property that is not properly registered.
Principal residence restriction
Limits home-renting to a principal residence only. This prohibits the operation of shadow hotels and/or large scale commercial enterprises operating under the veil of home sharing. A significant issue remains in that short-term rentals are permitted in areas without proper zoning but with some limitations.
Cap on Usage
Limits the number of days that a home can be rented through a home-renting platform. This helps to moderate the decline in available housing stock and the nuisance factors associated with the conversion of ordinary residences into commercial operations. Caps typically run from 30 to 180 days per year. Some condominium boards put the cap at zero days and some regulations require explicit approval from homeowners associations before short-term rentals can be offered.
Health and Safety Standards
Regulations that require certain standards for safety (e.g. smoke detectors, fire extinguishers, pest control). This provides some minimal level of protection for guests.
Reporting
A requirement at the platform and host level to report to government on all home-renting activity. This includes mandating that platform companies issue annual information slips to hosts on rental income with a copy to government authorities.
Taxation / Levies
Special provisions at the platform level to conveniently collect and remit various taxes and/or levies on behalf of hosts. This creates a more level playing field with commercial operators and provides revenue to government to cover the costs of managing home sharing activity.
Enforcement / Penalties
Mechanisms to ensure regulations are applied and enforced (e.g. confirm principal residence with a driver’s license). Effective enforcement can only be achieved with reliable and timely reporting of activity from the platform. Penalties help to ensure the system is operating as intended through voluntary compliance.