What are the tax implications of building a laneway house?
Before building a laneway home or buying a property with one, you should understand the tax implications. Here are three common laneway home scenarios.
If you own a principal residence and hire a builder to build a new laneway house and then rent or lease the laneway home to a non-relative.
The Canada Revenue Agency (CRA) considers you to be the builder, and to have:
- sold, repurchased, or “self-supplied” the laneway house at its fair market value;
- self-assessed and collected the GST on the sale; and
- paid the GST on the repurchase of the laneway house.
You must account for the GST on a GST/HST return (self-assessing), even if you weren’t the GST/HST registrant. You may:
- be eligible to claim a GST rebate on the construction of the laneway house, which is considered an improvement to the property, and on the land that forms part of the laneway house. Read RC Guide 4033 General Application for GST/HST Rebates
- claim the rebate on Form GST189, General Application for rebate of GST/HST using reason Code 7. For information, read GST/HST Memorandum 19.3.6, Rebate on Non-Registrant's Sale of Real Property.
- be eligible for a GST/HST New Residential Rental Property Rebate as a builder/landlord to recover some of the GST.
You own a principal residence and hire a builder to build a new laneway house for a relative, former spouse, or common-law partner to live in as their principal residence.
The CRA doesn’t consider that you have sold and repurchased the laneway house and collected the GST if:
- the laneway house is used primarily (more than 50 per cent) as a place of residence;
- the laneway house is not used primarily for any other purpose after construction of the house is substantially completed; and
- you didn’t claim any input tax credits (ITCs) when building the laneway house.
You can’t claim a non-registrant’s rebate for the GST paid on construction costs. You may:
- be eligible for a GST/HST New Housing Rebate for your principal residence; and
- claim the rebate on Form GST189, General Application for rebate of GST/HST, using reason Code 7.
You buy a property that includes a new principal residence and laneway house and you rent or lease the laneway home to another individual as a place of residence.
The CRA doesn’t consider you to be the builder of the laneway house or to have sold and repurchased the laneway house, or to have collected tax when it’s rented to a non-relative.
- You may be eligible for a GST/HST New Housing Rebate on the construction of the laneway house if a relative uses it as a principal residence.
- If you rent or lease the laneway house to a non-relative, you may be eligible for a GST/HST New Housing Rebate for your principal house if it’s your primary place of residence.
- You can claim the rebate on Form GST189, General Application for rebate of GST/HST, using reason Code 7. Read GST/HST Memorandum 19.3.6, Rebate on Non-Registrant's Sale of Real Property.
- You may be eligible for a GST/HST New Residential Rental Property Rebate. For more information, read CRA’s The HST/HST Implications of the Construction of Secondary Housing Unites (Laneway Housing).
Did you know?
A laneway home increases the value of a client’s home. Building a laneway home:
- could affect your eligibility to claim the Home Owner Grant because of the increase in property value beyond the price thresholds; and
- may also result in increased property taxes.
Laneway houses can affect your principal residence exemption.
How does a laneway house affect the capital gains principal residence exemption on a property owner’s income tax? The rules are complicated and outlined here.
Laneway homes and the Home Owner Grant
A laneway home may qualify as a separate residence under the Home Owner Grant if the property is partitioned. A property owner may apply to have the assessed value of their property partitioned. |
- the home owner previously couldn’t, or could only claim a reduced grant, because of the high assessed value of their property, and
- property consists of your principal residence and at least one separate residence.
It’s important for property owners to understand their options before building a laneway house or buying a property with a laneway house. For this reason, it’s best to seek a qualified legal or tax opinion.