Friends in Ottawa are thinking about doing just this, by creating a master suite in the garage of their bungalow, thereby not only creating more functional space for them (bigger closets, ensuite bath) but also allowing for a bigger bedroom for their growing little boy, who will soon need a bigger space for studying and hanging out with friends.
I also heard from a sweet friend in Calgary recently who has rented a room in the attached garage of a house near the university where she works, and she is so happy with the living space - which is private when she wants it, but also communal since she shares the kitchen with the owners. She gets an affordable and cozy home to rent, and the homeowners are making an income from their property and will be able to use the finished space as their own down the road. Win-win.
If you have an under-used garage (ie. a storage dump for things you never use!) think about cleaning it out, donating the "stuff" and making your home more spacious, organized and comfortable. Your life will never be the same! A couple of tips:
1. Maximize light so that it doesn't feel dark and cold, like a garage can. Open up new windows on the sides or back if possible, and perhaps keep the large front door space as a big opening or window. Also, add lots of good lighting, like pot lights and floor lamps like those from Kichler Lighting.
2. If you don't have a finished space above the garage, vault the ceilings to open up and make it feel more spacious.
3. You can probably get away with a mini split system for heating and cooling, since the garage probably isn't tied into the main system for the house. There are lots of options now available.
For more ideas, see these posts about converting your garage and converting a shed.