The short term vacation rental site AirBnB has been making lots of headlines in the last week but not for the right reasons. News has been circulating that local governments, including Quebec, are taking issue with several aspects of the wildly popular website.
Taxes, permits, and the effect of increased tourism in local communities have been raised by the US, Canada and other countries as well.
Declaring Airbnb Rental Income
On the subject of taxes, there are a few issues. The first is that hosts who rent out rooms in their homes might “forget” to declare the income.
Form T776 is what is used by Canadians at tax time to declare rental income. You should definitely consult your accountant to understand what you need to do to make sure you are compliant with the tax man.
If you are declaring the rental income you can also claim expenses. Here is AirBnB’s help page for tax related questions.
Rental income is added to your regular income and is taxed at the same rate. If you make $75,000 per year and have another $2,500 in rental income from a site like AirBnB, your income for the year will be $77,500 and will be taxed accordingly.
AirBnB has a lot of information for US residents/hosts, but not much for hosts in other countries.
Related: How To Generate More Income – Use AirBnB
Charging Sales Tax
The second tax issue relates to a special hotel tax that is tacked on to a hotel bill in certain cities. San Francisco for example has a 15% hotel tax that hosts in the city aren’t charging and remitting to the government. Paris, Rome, Venice and other European countries have similar taxes as well.
Lastly, you also might need to charge sales tax (VAT/HST/etc) on your rental as well.
To better understand how this all comes together, here’s an example.
Let’s say a host rents out a room for $100 per night for 25 nights over the course of the year and earns $2,500. If they don’t declare the income that goes straight to their pocket and there is nothing for the government.
Related: Ways To Make More Money
If a host rents out a room in a city where all three tax situations apply, things would look much different.
- Room Rate – $100
- Sales Tax – $13 (13%)
- Hotel Tax – $15 (15%)
- Total Room Rate – $128
The $2,500 earned with an income of $75,000 per year would translate into $1,675 after tax. As you can see, governments have a lot to gain by ensuring those who are making a lot of money this way pay their taxes! They will get the tax income from guests as well as hosts.
Do You Need A Permit?
The next issue is permits. Cities and hospitality associations don’t like the fact that someone can rent out a room in their home and not have to conform to the same rules and regulations of the hospitality industry. The industry feels they are being put at a disadvantage.
Related: 3 Ways To Save Money On Your Family Vacation
While I’m not an expert on this topic, these permits probably ensure that a hotel is registered, clean and safe.
Changing the Tourism Landscape
The next argument, which I am a little unclear on, is that a neighbourhood might be adversely affected if a large number of tourists start residing there through short term rentals.
Imagine a quaint little town or street that never had any tourists before, then some investors come in, buy a few properties and turn them into short term rentals.
In a short period of time the feel of the neighbourhood could change significantly and impact residents. I think the taxes and permit issues are bigger than this one but it’s certainly something to think about.
Final Thoughts
As you can see there are numerous issues being debated relating to short term rentals like Airbnb. The fact that all of this is going on means the business model is not only working but booming.
Related: The Many Hidden Costs Of Travel
While governments might not focus on the little guy who makes a thousand dollars a year on the side, larger operations will probably receive a lot more scrutiny. A balance will need to be struck between collecting taxes and ensuring guests are protected and fostering a successful business.
Andrew is a Canadian personal finance and investing blogger who recently moved to London, England. He has a background in technology and a passion for travel. His blog, She Thinks I’m Cheap aims to help Canadians build wealth by sharing facts, stories and advice.
The company had no problem attracting investors desperate for a place to put their money. People rushed to purchase shares so they wouldn’t be left out, scraping together whatever money they could, seeing only boundless opportunities for gain.
Excitement and tension increased in the same proportion as the increase in stock prices. Plans were made for spending their newly acquired wealth.
Related: Do Stock Market Cycles Influence Your Investing Behaviour?
Then, share prices started falling. People started panicking and sold their shares – many lost everything.
Does this sound familiar? It shouldn’t (except in a history lesson) because it happened in 1719-1720 and is known as the South Sea Bubble.
Tulipomania
Another famous bubble was the tulip bulb frenzy in the 1630’s. The novelty of tulips made them widely sought after and, therefore, pricey. The increased scarcity and demand drove prices up so fast and so high that one-month showed a twenty-fold increase.
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At the peak people were trading their estates and life savings for one tulip bulb.
Why is it called a bubble?
A bubble occurs when investors put so much demand on an investment that they drive the price up beyond any rational reflection of its actual worth.
It often appears as though the investment will rise forever.
Compare this effect to Bazooka bubble gum. People of a certain age will remember this appalling, latex-textured gum with its enclosed corny Bazooka Joe comic.
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The gum could be blown into a fair sized bubble. The larger the bubble, the thinner it got, which meant it started getting bigger and bigger – until it exploded all over your face and got stuck in your hair and eyebrows.
Investment bubbles follow the same process: a period of reasonable growth then a remarkable rise that accelerates even further. Prices climb so rapidly that what should make them obviously ridiculous becomes perversely attractive instead.
Near the end of every bubble more investors feel compelled to join in – causing the process to gather speed, until its inevitable implosion.
Modern day bubbles
High-tech bubble: Who can forget the “dot-com” craze? Computers and their technology were the latest thing, and investors wanted big, new ideas and advancements more than a solid business plan.
Related: The Beginner’s Guide On How NOT To Start Investing
In 1999 there were 457 IPOs issued, most of which were internet and technology related. Of these IPOs, 117 doubled in price the first day of trading. When the bubble collapsed the Nasdaq lost 78% of its value.
Housing bubble: House prices were soaring and interest rates were low, leading to real estate speculation and questionable lending practices as consumers viewed their homes as a “piggy bank” that they could extract cash from.
Mortgages were re-packaged and turned into AAA-rated securities (exceptional degree of creditworthiness according to Standard & Poor) and sold to investors who were seeking higher returns as well as to pension funds and mutual funds around the world.
Prices on these mortgage-backed securities eventually plummeted, prompting large losses for banks and other financial institutions and shares fell hard. Consumers lost big time when house values and retirement funds plunged in value.
What’s next?
Will we be facing another stock market bubble? From tulip bulbs to gold, if there’s lots of money to be made we want to be in on the rush.
Will it be in commodities, as emerging countries begin their own industrial revolutions?
Will there be another high-tech bubble? The highly anticipated Facebook IPO was the biggest in technology history even with the claims that the initial price was too high and not supported by potential revenue.
People were chewing their fingers when the Nasdaq had some technical glitches and orders couldn’t be filled.
Related: How To Avoid These Four Investing Mistakes
Apple shares had a record high of over $700 in September of last year. The price has since dropped but is still almost double the previous high in December 2007 ($199).
The Dow Jones Industrial Index is also reaching record highs on increased US corporate profits (even though many large corporations received free money from the Federal Reserve).
What can we learn?
For future investment success we should learn positive lessons from bubbles – such as the importance of diversification and independent research and staying with your planned asset allocation.
The unreasonable belief in the possibility of getting rich quick is the primary reason that people get burned.
Big leaps in share prices should be justified by the future prospects of the underlying companies.
Related: Why I Became A DIY Investor
Keep yourself informed and keep your emotions in check.
(Source on market bubbles: Investopedia)
Most defined benefit pensions – also known as gold plated pensions – were designed in an environment that supported and encouraged early retirement.
But things are different today. We’re living longer. Life expectancy increased from age 75 to age 82 in the last 35 years.
Gold plated pensions in the private sector have disappeared, while public sector pensions face criticism of growing deficits fuelled by early retirement subsidies.
Related: What Is A Defined Benefit Pension?
Defined benefit plans across the country are experiencing funding challenges. My employers’ pension plan is no different.
They’ve proposed changes to try and preserve the value of the plan for its members and address the long term financial security of the plan.
Their main focus is to redirect a portion of early retirement subsidies towards strengthening inflation protection for retiree pensions.
How the Current Pension Plan Works
My pension is based on my salary (average of the five highest years of earnings) and pensionable service (number of years I contributed to the plan), up to a maximum pensionable salary, which is set by the Income Tax Act and is $150,164 in 2013.
The formula goes like this:
1.4 percent x earnings up to the Yearly Maximum Pensionable Salary (currently $51,100) + 2 percent x capped earnings above the YMPE = pension earned for each year of service.
For example, someone who’s hired at age 40 and retired at age 65 with:
- 25 years of service
- $120,000 highest average earnings
- $50,000 average YMPE
Their pension would be calculated as:
1.4 percent x $50,000 +2 percent x ($120,000 – $50,000) = $2,100 for each year of service
Related: Decoding Your Company Pension Plan
The annual pension would equal to $2,100 per year x 25 years of service = $52,500 per year at 65
Early Retirement Conundrum
Reduced pension – You can retire under our current plan once you reach 55, but your lifetime pension will be reduced by 3 percent until you turn 60 or when you achieve the 80 factor (age + service equals 80), if earlier.
So if I retired at age 55 with 15 years of service, my total pension would be reduced by 15 percent.
If the proposed changes take effect, there will be a greater percentage reduction for each year that your retirement date precedes your 65th birthday.
- The reduction for retiring one year early (age 64) is 1 percent.
- The reduction for retiring two years early is 3 percent (1 percent for age 64 and 2 percent for age 63).
- The reduction for retiring three years early is 6 percent (1 percent for age 64 and 2 percent for age 63 and 3 percent for age 62).
- The reduction for retiring more than three years early (before age 62) is 6 percent plus 4 percent for each year that your retirement date is earlier than age 62.
Under the new plan, if I retired at age 55 my total pension would be reduced by 34 percent instead of 15 percent.
Unreduced Pension – Under the current plan, you can retire and receive an unreduced pension as long as you’ve reached age 60 or achieved the 80 factor, if earlier.
Related: Do You Have A Locked-In RRSP?
If the proposed changes take effect, the portion of my pension earned for service after 2014 will be reduced if I retire before 65. The 80 factor is no longer a factor.
Bridge Pension – Currently, you can retire before age 65 and receive a bridge pension that’s paid from your retirement date until age 65.
It’s equal to 0.6 percent of earnings up to the YMPE, and stops at age 65 once Government benefits are expected to start.
So if you were hired at age 35 and retired at age 60, with 25 years of service, your earned pension of $2,100 per year of service will be topped up by a bridge pension of $7,500 per year ($50,000 x 0.6% x 25 years) that is paid until age 65.
Under the new plan, the bridge pension will be eliminated for service earned after 2014; however it will continue to be paid on pensions for service earned before 2015.
Cost of Living Adjustment – Pensioners currently receive a guaranteed cost of living increase each year that is equal to 60 percent of the annual change in the Alberta Consumer Price Index (CPI).
Under the new plan, pensioners will receive a guaranteed annual cost of living increase of 75 percent of the change in the Alberta CPI (hey, an increase!)
Related: Will A Pension Plan Handcuff You To Your Job?
Compulsory Pension Age – You must take your pension on December 31st of the year you turn 69, even if you continue working.
Under the new plan, the date changes to December 31stof the year you turn 71, even if you continue working.
Elimination of 35 Year Service Cap – You currently cannot accrue more than 35 years of pensionable service, even if you continue working.
Under the new plan, the 35-year cap on pensionable years of service would be eliminated.
Final thoughts On Gold Plated Pensions
Gold plated pensions need to be fixed. They heavily subsidize early retirees, who can, on average, expect to collect their pensions for as long (or, in some cases, longer) than they’ve contributed to the plan.
Meanwhile, new plan members have been paying more to finance the retirements of those who have gone before them.
Related: Why More Companies Are Offering Defined Contribution Plans
The old defined benefit pension plan model is not sustainable (just look at Greece).
While it would have been nice to retire at 55 with a full, unreduced pension, I know that’s no longer even close to reality.
That’s why I’m working on my own brand of early retirement, one where the income from my investments and side business exceed my expenses and savings goals.
Then I can choose to truly retire early – on my own terms.