A client built a laneway house in his principal residence and began to rent it out in 2025. How should I prepare 45(2) election in this case? Should I include sq ft of the laneway house / floorplan / explanation only?
Can you explain the rationale for a S45(2) election? I don’t see the need.
It’s a simple addition to a PR. No difference than adding on to the main building.
I have delt with many of these.
This is not necessarily that straight forward and has been interpreted by CRA (with specific mention to the BC Housing Secondary Suite Incentive Program; whereby a ton of these issues came up and had to be addressed in this manner).
CRA’s view on this is that the homeowner undertook construction on a portion of the primary residence for conversion of a separate “self-contained domestic establishment” for the purposes of producing income (converting a portion of the property to income producing (or commercial-use), and where each unit on the property has a separate entrance and can be enjoyed seperate of one another. The provisions of 45(1)(c)(ii) DO apply to deem a partial change-in use having occurred.
The good new is you can make the partial election under 45(2)(b).. however, you’re still stuck with the “1 residence” rule.
The recent partial change-in-use applications to Section 45 were actually introduced in part because of issues like these arising.
The applications of CCA - 13(7) apply in regular course as well.
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The name” Principal residence”, as per CRA, principally is not a defined %, but usually 10% is used in other part of the ITA, if I remember correctly. If we apply that 10% to this situation, the area will have to be less than 10% if CRA challenges it. The tax folio only mentions incidental rental is allowed, so there is no clear answer to that, which means it’s subject to CRA’s discretion
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it’s subject to CRA’s discretion
Precisely. Again, see my explanation above. More than likely CRA will see this as a change-in-use in this case. Laneway houses are set in stone these days ..
Thank you very much for your input. I have one more question.
If my client builds a laneway house on the property and does not rent it out, then sells the property in the future, do you think he could claim the PRE on the entire property OR should I treat the main house (PRE) and laneway house (capital gain) as 2 separate units?
I hope I am wrong, but it appears it’s a step towards the elimination of principal residence exemption, the income tax folio does talk about partial change in use, but when I talk to clients about the % should be limited, especially with expenses, most of them not realized the risk involved, and wanted to max the expenses, that’s not something we can advise them
Personally, I wouldn’t recommend trying to claim the whole thing as a single property, since it has been effectively subdivided. It would be no different than buying a separate lot and building a house on it, then selling it.
However, I would pay attention to the fact that the land area has been effectively split. I’m not sure if these “laneway homes” have separate legal title from the main house (we have none here in my small city), but logically you can’t build a house without having a piece of land on which it exists.
So, the portion of the land on which the main house “sits” has been reduced, thus reducing the cost base of that property. The other portion of the land would be “transferred” to the laneway property, which would increase the cost base, and thus reduce the tax liability.
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You already know your client’s intent, you can’t change the fact there based on what your finding is that would be a violation of GAAR, that’s not something that only applies to CPA, you better watch out on all of your questions.
Also, for this question, you may want to take a look at ITA for future tax planning.
Even if you do not make the election, if you started to use part of your principal residence for rental or business purposes, the CRA usually considers you to have changed the use of that part of your principal residence unless all of the following conditions apply:
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your rental or business use of the property is relatively small in relation to its use as your principal residence
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you do not make any structural changes to the property to make it more suitable for rental or business purposes
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you do not deduct any CCA on the part you are using for rental or business purposes
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