Doubling Your Dwellings: Laneway Houses and the Principal Residence Exemption

UPDATE (October 2, 2025): This article has been updated to reflect changes in legislation, regulations, and accounting practices since the original date of publication (August 14, 2023).

The popularity of detached secondary dwellings (“laneway houses”) has continued to grow in the Lower Mainland since the City of Vancouver first approved them in 2009. Originally introduced to increase housing supply, they’ve become an increasingly common way for homeowners to create extra living space for aging parents or adult children, or generate rental income amid rising housing costs. 

While there are several tax issues that rise in connection with laneway houses, let’s examine the implications that a laneway house may have on your ability to claim the principal residence exemption (PRE) if you live in Vancouver.

Note: In areas without lane access, similar detached dwellings are often referred to as “garden suites”. For the purposes of this article, we’ll simply refer to them both as laneway houses.

A background on bylaws

Vancouver’s zoning bylaws now allow up to six dwelling units in some zones, on what were previously single-family lots. Historically, this included:

• The main house;
• A rental suite—an apartment contained within the main house (e.g., a basement suite); and,
• A separate laneway house, usually located in the backyard of the property.

It’s important to note here that the laneway house is a component of the existing property, and under current zoning rules, it remains part of the primary property and cannot be subdivided or sold separately.

Note: In areas without lane access, similar detached dwellings are often referred to as garden suites.

Laneway houses and the principal residence exemption (PRE)

As a homeowner, you may be able to enjoy a partially or fully tax-exempt treatment on the disposition of your home if it qualifies as a principal residence. Although certain other types of property might qualify as a principal residence, in most cases the home must be a capital property of the taxpayer and considered a “housing unit”.

A laneway house would generally be considered to be a housing unit, due to its ability to provide the same type of shelter and comfort as a traditional house. Therefore, your property that includes a main house and a laneway house would be considered to have more than one housing unit, jeopardizing your ability to claim the PRE on the whole property.

Only one of the two housing units can qualify as your principal residence for any given year, so you must designate either the main house or the laneway house when you sell the property. However, a laneway house can only be designated as a principal residence if it’s ordinarily inhabited by:

• You;
• Your current or former spouse/common law partner; or,
• One of your children

Therefore, a laneway house that is used to earn rental income generally can’t be designated as a principal residence.

The rest of the property

This is where it gets complicated.

The portion of your property that is land subjacent to the housing unit, plus the portion of any immediately contiguous land that can reasonably be regarded as ‘contributing to the use and enjoyment of the housing unit as a residence’, is generally considered to be part of your principal residence. Whether the land that is subjacent to the laneway house can be considered as contributing to the use and enjoyment of the main house as a residence is currently an open question.

While there are arguments that can be made in support of this position, the CRA has commented that[1] “where a portion of that land is used to earn income from business or property, such portion will not usually be considered to contribute to such use and enjoyment.” Therefore, any portion of your land primarily used to earn rental income (such as the area occupied by a rented laneway house) likely won’t qualify for the principal residence exemption.

As always—keep track of your documentation

Calculating the portion of the gain you realized on the disposition of your home that qualifies for the principal residence exemption is very complex. It requires a reasonable allocation of the sale proceeds and the cost of the property between the main house, the laneway house and the land[2]. It’s important to keep all documents and receipts related to the acquisition of the property and construction of a laneway house on an existing property. 

If you’re considering purchasing a property with a laneway house, or planning to build one on your current property, reach out to your DMCL advisor. They’ll make sure you understand all the tax implications of doing so and help you navigate the complexities of doubling your dwellings.

[1] Income Tax Folio S1-F3-C2, Principal Residence, P.2.32

[2] Per the preceding paragraph, the land might consist of two portions in which case an allocation must be made to each portion.