Garden Suites, Basement Units and ADUs: Tax Rules
Tax on building and renting a garden suite or basement unit: rental income, CCA, HST self-supply, the principal residence exemption and the MHRTC.
The short version
- A garden suite, basement unit or other additional dwelling unit (ADU) you rent out is a rental property: the rent is taxable on form T776, and the building cost is capital, deducted over time through CCA if you choose.
- Building a new unit and renting it out can make you a builder for GST/HST: you may owe HST on the unit's fair market value when the first tenant moves in, with rental rebates to recover part of it.
- The rented unit's share of the property generally isn't covered by your principal residence exemption for the years it's rented. Your own home stays covered.
- Building it for a parent or a relative with a disability, rent-free? The multigenerational renovation credit can pay back up to $7,000 (2026), and HST self-supply usually doesn't apply.
- Claiming CCA on the suite lowers tax now but comes back as recapture when you sell. Many owners skip it.
Garden Suites, Basement Units and ADUs: Tax Rules
Ontario now allows up to three units on most serviced residential lots (the house plus two more), and a lot of people are doing the arithmetic: $150,000 to build, $2,000 a month in rent, a decent return on the backyard. The tax arithmetic is the part that gets skipped. Rent is income, the building is capital, the HST rules treat you like a developer for a day, and the sale years later has a piece that isn't tax-free. None of it kills the deal. All of it should be in the spreadsheet.
The Tax Picture, Start to Finish
| Stage | Rented at market rent | Family, rent-free |
|---|---|---|
| Building it | Cost is capital; HST self-supply may apply when first rented | MHRTC up to $7,000 if a senior or adult with a disability moves in |
| Each year | Rent minus expenses is taxable; CCA optional | No rental income, no deductions |
| Selling the property | Gain on the suite's share is usually taxable; CCA claimed is recaptured | Depends on the facts; see below |
Running the numbers on a garden suite?
Tell the assistant the build cost, expected rent, your income and province, and whether family or a tenant will live there. It shows the yearly tax, the HST question and what happens when you sell.
Renting It Out: Yearly Tax
- Income: all rent received, on form T776.
- Expenses: 100% of costs only for the suite (its utilities, insurance rider, repairs), plus a fair share of shared costs like property tax and mortgage interest on money borrowed to build it. See rental expenses.
- Example: $24,000 of rent, $6,500 of expenses: $17,500 of taxable income, taxed at your marginal rate.
- CCA: a separate building is generally class 1 (4% a year, half in the first year). Optional, and recaptured on sale; see CCA.
HST When You Build to Rent
When an individual builds a new residential unit, or substantially renovates to create one, and then rents it out, the Excise Tax Act treats them as having sold it to themselves at fair market value. That's the self-supply rule, and it can mean HST on the suite's value, reported to CRA. The new residential rental property rebate gives back part of the federal portion, and Ontario has its own provincial rental rebate; details on GST/HST rental property rebate and OntarioHSTRebates.ca. Rules on new housing and HST in general: GST/HST on new homes.
When You Sell
- Your own home: still covered by the principal residence exemption.
- The rented suite: its share of the gain, for the years rented, is usually a taxable capital gain, plus recapture of any CCA. See change of use.
- Family rent-free: the suite is a separate housing unit you don't live in, so whether its share is part of your principal residence is less clear. We're not certain how CRA would treat every case; get advice before you sell.
- Keep records of the build cost and an appraisal of the split between house and suite.
Renting a room or basement inside your own home is simpler; see renting part of your home. For a parent or relative with a disability, see the multigenerational home renovation tax credit. Zoning, permits and design for Ontario garden suites are covered at GardenSuiteOntario.com.
Garden Suite Tax Questions
Is rent from a garden suite taxable?
Yes. Rent is income reported on form T776, minus expenses for the suite and its share of shared costs. Capital cost allowance on the building is optional.
Do I have to pay HST when I build a garden suite to rent?
Possibly. When an individual builds a new residential unit and rents it out, the self-supply rule can require HST on its fair market value. Rental rebates recover part of it. Get advice before the first tenant moves in.
Does a garden suite affect my principal residence exemption?
Your own home stays covered. A rented suite’s share of the gain, for the years it was rented, is generally taxable when you sell.
Is there a tax credit for building a suite for a parent?
Yes. The multigenerational home renovation tax credit is refundable: 14% of up to $50,000 of costs for 2026, up to $7,000, if a senior or adult with a disability moves in with a qualifying relative.
Should I claim CCA on a garden suite?
It lowers tax on the rent now, but the CCA claimed is added back to income as recapture when you sell. Many owners skip it unless the rental income is high.
Sources: CRA, Guide T4036, Rental Income; New residential rental property rebate; Folio S1-F3-C2, Principal Residence. Checked October 2026. The CCA class for a suite depends on how it's built and attached. HST self-supply and principal residence treatment of additional units depend on the facts; this page explains the general rules only.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.