CRA reviews the effect of receiving a BC forgivable loan to construct and rent out a secondary suite

The BC Secondary Suite Incentive Program assists qualifying homeowners to create a new secondary suite or accessory dwelling unit (a “Secondary Suite”) on the property of their principal residence, by providing a forgivable loan in the amount of 50% of the Secondary Suite’s construction costs, subject to a maximum loan amount. It must be rented at no more than a rent affordability limit for at least five years to a tenant who is not an immediate family member, and the loan amount will be forgiven over five years if all of the program requirements are satisfied.

The findings of CRA included:

• The Stewart test likely suggests that (even with the below-market rents), the Secondary Suites constitute a source of income, being property income, notwithstanding any generation of a loss.
• The forgivable loan when received would reduce the cost of the property pursuant to s. 13(7.1) or 53(2)(k), so that s. 12(1)(x) would not apply by virtue of the exclusion in s. 12(1)(x)(vi).
• The creation of a Secondary Suite, either within or detached from the homeowner’s home, generally would trigger a deemed disposition pertaining to the converted portion, pursuant to s. 45(1)(c)(ii).
• However, the homeowner could make an election pursuant to s. 45(2) to defer the recognition of any resulting gain to a later taxation year.
• For principal residence exemption purposes, the Secondary Suite, and the balance, would be treated as two distinct housing units (essentially because each could be ordinarily inhabited separate from the other) so that the principal residence exemption for any particular year could only be claimed for one of the two units, as also discussed below.
• Although the ordinarily-inhabited condition under the principal residence definition would not generally be met for the Secondary Suite while being rented to third parties, where it was subject to the s. 45(2) election it could nonetheless qualify as the taxpayer’s principal residence for up to four taxation years during which the election remained in effect – so that the homeowner would be able to choose for such a year to designate the Secondary Suite rather than the balance of the property as that taxpayer’s principal residence.

Neal Armstrong. Summaries of 27 June 2024 External T.I. 2023-1000391E5 under s. 3(a), s. 54 – ACB, s. 13(7.1), s. 45(1)(c)(ii), s. 45(2) and s. 54 – principal residence.