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Tax implications of building a laneway suite

March 1, 2021 Jason Heath
Tax implications of building a laneway suite

I have not seen anything published with respect to whether such a building would impact your principal residence exemption, particularly if your existing property already has a rental unit in the basement, or is a triplex.

A. 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.

When you build a home or earn rental income, Mitchell, typically there are tax implications.

Constructing a laneway house may cause the homeowner 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.

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