An alternative to traditional income properties, Toronto’s vibrant tourism industry offers ample opportunity for investment. Over the past few years, short-term rentals have become an increasingly popular avenue for earning passive income – and for good reason. With a small and easily manageable labour input, operating a short-term rental property can bring in some truly great earnings.
While short-term rentals can be a good investment opportunity, they do come with a lot of red tape, far more than a traditional rental unit. Being underprepared around regulations and bylaws can potentially land you in hot water. Before you begin shopping for the perfect place in Toronto to set up a short-term rental, there’s a lot to know.
As real estate investment specialists in Toronto’s west end, we’ve helped countless clients find the right property for them. If you’re looking to buy a property and create a short-term rental unit, here’s what you need to know.
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Toronto’s Short-Term Rental Landscape
As a global tourist destination, Toronto’s short-term rental market is hot. Since their rise in popularity, services like Airbnb or Booking.com have connected travellers with high-quality accommodations and allowed investors to cash in on the demand.
However, it has taken time for some neighbourhoods to adjust to the steadily rising volume of short-term rentals in the city, and new restrictions and regulations have emerged to protect community interests.
While managing a short-term rental might feel like a side hustle, it’s a fully-fledged business in the eyes of the city. This means that short-term rentals are, like businesses, subject to various laws and regulations. The City of Toronto defines a short-term rental unit as a property (or portion of a property) that is rented out for a period of 28 days or less in exchange for payment.
First things first, all short-term rentals in Toronto must be formally registered with the city every year. There is a small registration fee, however, this process is fairly easy and can be done online.
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Bylaws & Restrictions
Beyond registration, there are a lot of bylaws and restrictions that impact short-term rentals. These bylaws are important to understand as they dictate where and how short-term rentals can be owned and operated. In Toronto, investors are allowed to run a short-term rental property at their primary residence – meaning the address you use for bills, identification, taxes and insurance with minimal restrictions. At your primary residence, you’re able to operate a short-term rental unit for as many days as you wish annually. However, if you purchase a dedicated investment property, you may only carry out short-term leases for a total maximum of 180 days each year.
While some investors may attempt to bypass this regulation, it’s important to note that fines for breaking these rules can be very steep.
Additionally, short-term rentals can only be operated in certain areas of the city. While most residential areas have zoning permissions for these types of rentals, you’ll want to do your research and talk to your real estate agent about applicable bylaws before you buy an investment property.
Safety Regulations & Record Keeping
After completing the setup process, there are a few basic safety regulations that you’ll need to follow as you operate your rental. Here’s an overview of some of the basic requirements. You’ll need to:
- Keep a detailed record of each stay, including the duration, daily and total price of rental, and information on which parts of the property were rented.
- Provide guests with an emergency exit plan.
- Provide guests with information about local emergency services.
- Display your registration information on online listings.
Municipal Accommodation Tax
In addition to HST, all short-term rentals in Toronto are required to hold a Municipal Accommodation Tax (MAT). The MAT is 4% and is required for any rental transaction of fewer than 28 days. You’ll be required to pay your MAT on a quarterly basis, and will need to submit an MAT report each time – even if you didn’t host any guests during that time period.
Depending on which rental platforms you choose to work with, you may be able to sign a voluntary collection agreement, which allows the company to collect and remit the MAT for you.
In addition to the MAT, there are other taxes to be prepared for. Just like a normal rental property, earnings from short-term rentals are subject to income taxes. In order to avoid an unpleasant surprise during tax season, you’ll want to put a portion of your income aside every month.