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The potential to earn rental income sounds great, but unauthorized second units come with financial and other risks.
If you’re buying a property right now, chances are you’ve come across more than a few homes that advertise income potential—thanks to a secondary suite or basement apartment.
Beyond the practical reasons for wanting a secondary suite, such as having a senior-age parent move in, two-unit homes usually represent a valuable source of rental income for the owner. But becoming a landlord is a significant responsibility, and you could find yourself on the hook—both financially and legally—if you fail to abide by the rules.
So, how can you find out if a home’s secondary suite or basement apartment is legal before you buy? Or, if you see potential for a second unit, what would it take to build one yourself? We break it all down here.
A secondary suite is an umbrella term that encompasses second units within a home, basement apartments, laneway houses and in-law suites.
Typically, to be considered a secondary suite, the space must be a self-contained unit with a private kitchen and bathroom, and it must also have a separate entrance. Most secondary suites are located within a principal dwelling, but they can also be elsewhere on a property, as in the case of laneway houses and coach houses.
Secondary units are generally allowed within detached houses, semi-detached houses and row houses, though regulations can differ from one municipality to another.
No. Many existing secondary units are unauthorized and/or do not meet the requirements for legal rental accommodations.
Property owners must have authorization from their municipality and meet strict building codes and requirements in order to create and maintain a secondary suite within their home. These regulations are designed to ensure the health and safety of landlords and their tenants.
If you’re buying a home with an existing secondary suite, or you plan to renovate and build your own, ensure the unit is registered with or licensed by the city. The unit will also have to be inspected by city officials, as well as fire service and electrical service inspectors, and granted the proper building permits. If you don’t have them, you could be fined by the municipality and required to end current tenancy agreements. Finally, you will also need landlord insurance.
In Canada, the provinces and territories set their own building codes and regulations. The specific rules can vary from one province or territory to another, but most have standards and requirements that cover things like:
Although these standards are implemented by the provinces and territories, municipalities enforce zoning and land-use bylaws that allow for secondary suites to be built. This means secondary suites may be legal in some parts of a province or territory but not in others. So if you’re buying a home with a secondary unit, or you’re planning to add one to a property, confirm what is allowed and required with your local government.
If you’re building a secondary unit as part of a single-dwelling home, one of the most important steps is obtaining the proper permits. Permits grant you the approval to make changes to the property and certify that the work will be done safely and according to code. It doesn’t matter if you’re not doing major construction—a permit may be needed simply to change the use of the building.
Depending on the scope of the work, you may need to request permits for different components, including the building, plumbing and electrical.
You should never create or maintain a two-unit dwelling without proper authorization. Without a permit, you may be fined, forced to end your tenancy agreement or ordered to stop construction (regardless if the demolition work is already in progress).
Being found in violation of building codes, such as fire safety standards, can also lead to prosecution and significant fines—even jail time. In Ontario, for example, a fire code violation can result in a fine of up to $25,000 and a prison term of one year. Any income you might receive from renters pales in comparison.
If you plan to buy a property with a secondary unit, you should still have the unit inspected and approved for tenant use by the municipality. If the unit was not previously authorized, and a fire or flood occurs under your ownership, you could be held responsible for building code violations.
And don’t be caught off guard by a surprise inspection. Remember that anyone can inquire and request an inspection of your second unit. It could be a neighbour or tenant, or even a city official inspecting a different unit in the neighbourhood. Protect yourself by ensuring everything is up to code from day one.
For many Canadians, rental income is one of the most obvious benefits of owning a secondary suite. The additional money can lower the costs of home ownership by helping you pay your mortgage, property taxes, maintenance costs and utility fees. But there are other possible benefits. Secondary suites can:
Property owners should also be aware of the impact a second suite can have on their income tax and insurance costs.
In Canada, anyone who receives income from renting real estate must file a statement of income and expenses. It’s possible for rental income to be considered business income. But unless you offer your tenants services such as cleaning and security, the rental income is more likely to be considered personal income and taxed at your marginal tax rate.
You may be able to deduct the expenses related to a second suite from your rental income. (Read about the expenses you can deduct when owning more than one property.) Some expenses can be claimed in the same tax year, while others must be claimed over several years. And some expenses that apply to the entire property can only be deducted in proportion to the size of the suite. For example, if the suite occupies one-third of the property, you can deduct one-third of certain expenses.
In Canada, property taxes are based on the current assessed value of your property. A secondary suite can increase the assessed value of your home, which can raise the cost of your property taxes. However, according to Ontario’s Landlord’s Self-Help Centre, property values do not generally increase enough to result in a property tax bump. Depending on the location of the property, owners in Ontario can expect an increase of 2% to 5% in the value of their home.
Once you have a second suite, you will have to notify your home insurance provider about the change in the status of your property. You can expect to pay 15% to 50% more in premiums annually, due to the increase in liability coverage and value of your home—though you can claim part of the insurance costs as tax-deductible expenses.
A secondary suite offers the possibility of earning additional income that can help offset your home ownership costs, such as your mortgage payments, utility fees and property taxes.
Beyond that, it can serve as an investment, increase the value of your home, help keep family members under the same roof, or even help protect the home (and lower insurance costs) if you expect to live elsewhere for extended periods. A second suite can also make a home more attractive to some home buyers when it comes time to sell.
However, being a landlord comes with many responsibilities and costs. Building and maintaining a secondary suite requires commitment and knowledge of local and provincial or territorial laws. If you intend to buy a home with a secondary unit, or retrofit your current home, be sure to have the necessary permits and documentation—or ask the current sellers for theirs.
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Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
Let’s say you for the legal unit, you use 40% of the costs ( electicity, property tax, water and gas) as write off of your personal taxes and when you sell that property, are you going to be taxed on the capital gains on 40% of your otherwise principal home?
Thank you for the question. We invite you to email it to [email protected], where it will be considered for an update or future articles.