Tax Implications on Laneway Houses

Laneway Houses, or those housing units that are built on the back of property lots, usually with access from an alley, are becoming more and more popular in Metro Vancouver. The City of Vancouver is onboard, as they are trying to increase the density of existing housing stock to meet the needs of Vancouver’s expanding population. Laneway houses are also beneficial to homeowners, as the rent that can be obtained on a separate house unit can increase cash flow, and these detached units demand a rent premium due to their self-contained nature. Other potential uses include keeping an elderly or disabled relative close by, an adult child attending school, or a live-in nanny or housekeeper. Regardless the reason, it is likely you will see more and more of these in the future.

However, before you dig out your shovel to start construction, there are many important tax implications which need to be considered. Here are a few notes from a recent presentation that Don attended:

  • Only one legal title covers all dwelling units on the property, the laneway cannot be split off
  • A home-owner’s principal residence exemption on capital gains may be negatively affected, as the laneway house is not necessary to the use and enjoyment of the main residence
  • Provided the other criteria for the principal residence are met, the exemption from capital gains will continue to be available on one of the housing units, but not both
  • When a taxpayer builds a laneway house on their personal use property to produce income, immediate tax issues could be triggered, such as:
    • Partial change of use
    • Disposition at FMV
    • Principal residence designation required
  • It may also be necessary to apportion the property between personal use and income use for purposes of determining a deemed disposition

There are many other small nuances which I won’t go in detail here, but suffice to say you can easily end up in the CRA’s bad books if you are not careful. If you are considering building a laneway house, or your already have one, we encourage you to speak with us to ensure the tax implications are properly understood and integrated into your plan.

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