Tax implications of building a laneway suite
Recent changes to zoning laws now allow Toronto property owners to build a laneway house or garden suite on the back portion of their property, provided it meets various emergency access and lot size requirements.
Changing the zoning of your property may impact your principal residence exemption, particularly if your existing property already has a rental unit in the basement, or is a triplex. Any time a homeowner becomes a landlord, there may be GST/HST and income tax implications that should be taken into consideration. And when you build a home or earn rental income, there are tax implications.
Constructing a laneway house may cause the homeo
Toronto and other cities across Canada have introduced laneway suite initiatives to incentivize homeowners to develop laneway suites—secondary dwelling units at the rear of their property, adjacent to a publicly-accessible lane. The City of Toronto also has an Affordable Laneway Suites Program with loans of up to $50,000 to be forgiven over 15 years as long as the rent charged does not exceed the city’s average market rent by bedroom type during the period. This loan/grant program was so popular that the city had to stop the program due to overwhelming applications.
Constructing a garden suite or laneway suite may cause an owner to be considered a builder for GST/HST purposes. The homeowner may be deemed to have sold and repurchased the laneway house (self-supplied) at its fair market value upon completion. They are then considered to have collected the resulting GST/HST on the notional sale whether they are a GST/HST registrant or not. That means the homeowner is then required to pass along the GST/HST “collected” to the Canada Revenue Agency. An exception may apply when a laneway house is leased to a relative.
To offset the GST/HST payable, the homeowner can claim GST/HST paid to a contractor, for supplies, or for other expenses related to the construction. This GST/HST paid is considered an input tax credit that reduces the GST/HST deemed collected on the notional sale of property to themselves.
A homeowner may also be entitled to claim a GST/HST new housing rebate if they or a relative subsequently live in the laneway house.
If the laneway house is rented to a tenant, the homeowner may be able to qualify for a GST/HST new residential rental property rebate.
In addition to the federal rebates for GST or the federal portion of the HST, there may be provincial rebates for the provincial portion of the HST.
When you start to rent out part of your homel, whether it is a single room or a laneway suite, the Canada Revenue Agency generally considers you to have changed the use of that part of your principal residence. There is an exemption if three criteria apply:
- Your rental use of the property is relatively small in relation to its use as your principal residence (less than 50%);
- You do not make structural changes to the property to make it more suitable for rental purposes;
- You do not deduct any capital cost allowance (depreciation) on the part you are using for rental purposes.
If you do not meet the above criteria, you may be deemed to have had a change in use of your principal residence, a deemed disposition, and a reacquisition of the property at the fair market value at that time. Since 2016, homeowners are required to report the disposition of the property to claim the principal residence exemption.
When you sell or change the use of the property in the future, you will have to split the sale price between the part of the house used as your principal residence and the part used for rental purposes. This means a part of the eventual proceeds will likely be subject to capital gains tax. Only a portion of the home may qualify for a principal residence designation and be tax-free.
Building homes and renting real estate can have GST/HST and income tax implications. Professional advice should be sought, given the numbers involved can be quite large.
