Building a laneway home is a significant commitment that requires time and resources. You need to ensure you hire the appropriate architect, builder, and tradespeople to make your laneway home dream a reality.
Regardless of why you are building a laneway home, whether it be to age in place, keep an elderly parent nearby, enable a child to enter the real estate market, or generate rental income, you must be aware of the tax implications and the significant rebates available to you. Taking advantage of these rebates could result in thousands of dollars in your pocket.
If you are building a laneway house for yourself or family:
If you are constructing a laneway home for your primary residence or for an immediate family member, such as a parent, child, sibling, or ex-spouse, you should be aware that a rebate is available to you. This is the HST New Housing Rebate, which can be as high as $16,080, or possibly higher under certain conditions. You can apply for this rebate once construction is complete, and you or a family member has moved in. You have 2 years to apply from the move-in date, after which the rebate will be disallowed.
If you are building a laneway house for long-term term rental:
Building a laneway home to generate rental income has different rules and rebates. The homeowner is considered a “builder” for GST/HST purposes. Once a long-term tenant occupies the laneway home, the homeowner has a legislative obligation to determine the fair market value of the laneway home, and HST is owed to the CRA on that value. This is called a self-assessment or self-supply. To offset the amount owing on the fair market value assessment, the homeowner may claim two rebates.
The first rebate allows for claiming all the HST paid on construction, including architect, survey, engineering, labour, and materials. The second rebate is the HST Rental Rebate.
The significance of the amount of the rebate is most easily explained by example. Note that fair market value is not necessarily equal to the amount spent on construction, but for simplicity, the following example makes them the same.
Here’s how it works:
If the fair market value of the laneway home is $450,000, then 13% of that value, which is $58,500, is owed to the CRA. If $450,000 was spent on construction, there is $51,770 of HST embedded in the cost of construction. This amount can be applied as a rebate to offset the amount owing on self-assessment. At a fair market value of $450,000, the rental rebate would be $24,000. Therefore, a homeowner would receive a rebate of ($51,770 + $24,000) – $58,500 = $17,270!
There are similar 2-year time frame limits to apply for these rebates, so care must be taken to file them on time. The rebates are not considered income, but a refund of sales tax paid. They are TAX FREE!
If you are building a laneway house for short-term term rental:
If building a laneway home for short-term rental, this is considered a commercial activity, and different rules apply. Self-assessment is not necessary, and there are no rebates available, but you can claim the HST paid on construction as Input Tax Credits.
Building a laneway home can be a beneficial investment, whether for personal use or generating rental income. However, it is essential to be aware of the tax implications and rebates available to maximize your financial gain. The HST New Housing Rebate is available for those building a laneway home for their primary residence or immediate family member, while those building for long-term rental can claim the HST Rental Rebate and the HST paid on construction. It is crucial to apply for these rebates within the two-year time frame and file them on time. Overall, with the proper planning and understanding of tax implications, building a laneway home can be a sound financial decision.
This article is for general information purposes only. These are complicated issues that should be handled by a professional and should not be ignored, as there are thousands of dollars at stake. Please don’t hesitate to reach out to Rami with any questions!
Rami Miransky has an MBA from York University and has been a financial advisor for over 25 years. Over the last 10 years, he has become an expert on the rules and regulations regarding HST and New Residential Real Estate. He recently was a guest speaker at the National Home Show on the subject and has helped hundreds of homeowners claim the rebates they are entitled to.
HST Rebate Specialists