Like Jerry Maguire, I often start my day with a clap of my hands and a quiet “today is going to be a great day” – part of the secrets to success from Jerry’s mentor Dicky Fox. I imagine at least 1,000 folks will need to seek their own positive reinforcement once they read the rest of this article.

Over the past 6 years laneway homes have soured in popularity in Vancouver. A laneway home is typically built into a pre-existing single family lot, usually in the backyard and opening onto the back lane. A quick drive around most neighborhoods will reveal some gems and some lemons that have cropped up in our back lanes. The City of Vancouver has issued more than 1,000 laneway home building permits since they became legal in 2009 and 348 in 2013 alone. Whether you like them or not, you better get used to them as they are here to stay as they add affordable rental capacity in the city. Hopefully the city planners will continue to enforce the highest building standards to ensure that laneway homes enhance our beautiful city.

The average price for a detached home in Greater Vancouver as of January 2016 was $1,830,000 according to the Real Estate Board of Greater Vancouver. Unless you want to commute from Maple Ridge or the Sunshine Coast, people are looking towards creative solutions to live closer to where they work. It is not surprising that many families are turning to laneway homes as a solution to the affordability crisis in Vancouver. Sure, laneway housing can reduce our carbon footprint, increase rental options and ensure Vancouver remains one of the most livable cities in the World. Great. But there is a downside, perhaps unintended, for those that have ventured to add a laneway home to their property.

In Canada, if you sell your principal residence many rely on the principal residence exemption to eliminate or reduce the capital gain on the sale of a property.  A property must qualify to be a principal residence. Paraphrasing, the property must meet all of the following 4 conditions to qualify as your principal residence for any year:

  1. It is a single housing unit – i.e. it is not a commercial or other non-residential property.
  2. You own it solely or jointly.
  3. You actually lived in it during the year.
  4. You can only designate one property per year.

Here is the catch. Your new laneway home is considered a separate housing or dwelling unit. See the City of Vancouver Laneway House Guidelines which defines a laneway homes as a separate dwelling unit. Only one housing unit is eligible for the principal residence exemption. Technically, this means that a portion of your valuable property no longer qualifies for the principal residence exemption. Yikes!

It gets worse. The clear benefit of adding a separate dwelling unit is to earn rental income and to offset or service a mortgage. However, when you build a laneway home it is considered a change in use of the property, which results in a deemed disposition and subsequent reacquisition of the property at fair market value. It is as complicated as it sounds and there may be tax implications on the deemed disposition depending on whether that part of the property is covered by the principal residence exemption. And worse, there are GST implications on the building of the laneway home, and the homeowner will need to self-assess GST if it is an owner-built property. The government has offered some GST rebates for those building laneway homes for purpose of renting, but it has been a nightmare for taxpayers to recover the GST.

“Today is still going to be a great day”, but the bottom line is that the homeowner will lose a portion of the principal residence exemption, there may be tax upon the deemed disposition for the change in use, and there will be GST issues.

Please note that all information is general in nature and should in no way be construed as tax advice. If you have already added a laneway home, the potential tax is unfortunate but there is a bright side. Property values will continue to rise and your Laneway homes has certainly increased the value and attractiveness of your property. If you think this may apply to you, or if you are contemplating adding a laneway home, we strongly suggest that you talk with a tax advisor about ways to minimize or avoid the potential tax consequences of adding a laneway home to your property.

I’d be happy to respond to any emailed questions or comments at

Article contributed by Mike McIsaac CPA, CA