Laneway Houses: GST/HST Implications

Vancouver is promoting affordable housing through densification: a single-family lot may now include the main house and a detached laneway house, which is usually constructed in the backyard of the main house and usually opens onto the back lane. Hundreds of laneway houses have already been constructed, principally as a way to generate some rental income to offset high mortgage payments. Other cities with high real estate prices are considering similar changes to zoning rules.

The GST/HST issues associated with laneway housing—which are often missed and, when discovered, trigger a frantic search for past receipts—depend on whether the first user of the laneway house is (1) a long-term tenant or (2) a short-term occupant. (The income tax implications of laneway houses are described here.)

Long-Term Tenant

This situation is described in detail in GST/HST Info Sheet GI-168, “The GST/HST Implications of the Construction of Secondary Housing Units (Laneway Housing),” June 2014.

Suppose that the homeowner who contracts for the building of the laneway house on his or her property is not registered for GST/HST. (This is the typical situation.) If the first use by the owner of the laneway house is to rent the house to an arm’s-length party for a continuous stay of longer than 60 days, the owner
  • must self-assess GST/HST on the fair market value of the laneway home and the land associated with it;

  • is entitled to claim ITCs for the amounts of GST/HST paid on the construction of the laneway house (subject to the usual ITC claiming rules);

  • may also be able to claim a GST/HST rebate for new residential rental property in respect of the laneway house if the laneway house’s land and building value (often estimated by capitalizing rent) is less than $450,000; and

  • may also be able to claim a BC provincial new-housing rebate if any portion of the construction was performed before April 1, 2013.

The rules above apply because the homeowner is considered the builder of the laneway house for GST/HST purposes. (Note that the homeowner is not considered a builder if he or she purchases a property that already includes a laneway house.)

On the other hand, if the first use by the owner of the laneway house is to allow a related person (as that term is defined in the Income Tax Act) to live in the laneway house as his or her primary place of residence for a continuous stay of longer than 60 days, the consequences are different:
  • the owner is not required to self-assess GST/HST;

  • the owner cannot claim ITCs on construction costs;

  • rebates of equal value to those described above in the arm’s-length situation are available; and

  • if the owner subsequently decides to rent the property to an arm’s-length party, he or she will not have to self-assess the value of the laneway house and associated land, because the status of the property will have changed to a used residential complex.

Thus, the first occupancy of a laneway house by a related person provides the best outcome for the owner because, for rental to an arm’s-length party, the self-assessment on the land value will often create a significant GST/HST liability; the self-assessment on the building value will be approximately cancelled out by the associated ITC claim for the building construction.

Short-Term Occupant

In the less common (hotel-like) case, where the property is repeatedly rented for periods of less than one continuous month, the homeowner need not self-assess, and the two rebates are not available to him or her. However, the owner is entitled to claim ITCs for GST/HST on construction costs and ongoing operating costs, and for this reason he or she will want to become a GST/HST registrant.

Rent paid in this situation is subject to GST/HST (unlike rent paid by long-term tenants, which is exempt). GST/HST will apply on resale if the laneway house is being used to provide short-term accommodation at the time of sale.

GST/HST implications are more complex in situations that alternate between long-term tenants and short-term occupants.

Matt Beck
Grant Thornton LLP, Vancouver
[email protected]

Canadian Tax Focus
Volume 5, Number 3, August 2015
©2015, Canadian Tax Foundation