Renting Out Part of Your Home in Canada: Tax Guidance for Homeowners
Renting out a basement or spare room? Ottawa CPA Majdi Ibrahim explains deductions, principal residence exemption, CCA risks, and change-in-use rules.
By Majdi Ibrahim, CPA | Majdi Ibrahim, CPA Professional Corporation | Ottawa, Ontario
Renting out a basement apartment, a secondary suite, or a spare room is one of the most common ways Ottawa homeowners supplement their income. It's also one of the situations where people most often discover — sometimes years later — that the tax side wasn't handled the way they thought.
This article covers what you actually need to know: how partial rental income works, what you can deduct, how to split expenses correctly, what happens to the principal residence exemption, and when the change-in-use rules become relevant. It's written for homeowners who rent part of their home on a long-term basis — if you're renting short-term through Airbnb or a similar platform, our short-term rental article covers those rules.
At a Glance
Rental income from part of your home is taxable. Even if it's "just a basement apartment," the income needs to be reported.
Only the rental portion of expenses is deductible. You can't deduct 100% of your mortgage interest, property taxes, or utilities — only the portion attributable to the rental space.
Renting part of your home can affect the principal residence exemption. If a portion of the home is used exclusively for rental income, part of the gain on sale may be taxable, depending on the facts.
CCA on the rental portion of your home is usually avoided. Claiming Capital Cost Allowance on the rental portion of your principal residence can affect the principal residence exemption. In many partial-principal-residence situations, advisors recommend avoiding CCA unless the long-term consequences have been reviewed.
The change-in-use rules can create a deemed disposition. If you start or stop renting part of your home, or if the nature of the use changes significantly, there may be tax consequences — even without selling.
Who This Applies To
This article is for homeowners who:
- Rent out a basement apartment, in-law suite, or secondary unit
- Rent out one or more rooms to a boarder or student
- Have recently moved out of part of the home and started renting it
- Are thinking about converting part of their home to a rental unit
If you're renting your entire home (not just part of it), or renting for short periods through Airbnb, the rules are somewhat different. For short-term rentals, see our Airbnb and short-term rental article. For full-property rentals, see our rental income tax guide.
Reporting the Income
Rental income from part of your home is reported on Form T776 (Statement of Real Estate Rentals) as part of your personal T1 tax return. You report the gross rental revenue — rent received, plus any amounts the tenant pays for utilities or other costs that are normally the landlord's responsibility — and then deduct allowable expenses to arrive at net rental income or loss.
Net rental income is added to your other sources of income (employment, self-employment, investment) and taxed at your marginal rate.
There is no minimum income tax reporting threshold. Even if the rental income is modest — a few hundred dollars a month from a boarder — it needs to be reported. The same obligation applies whether the arrangement is formal (written lease, separate entrance) or informal (a friend renting a room).
If you provide significant services beyond basic accommodation — such as meals, regular cleaning, or other boarding services — the reporting may need to be reviewed, because the arrangement may look less like passive rental income and more like a service-based activity.
What Expenses Are Deductible
When you rent out part of your home, you can deduct a proportionate share of the expenses related to the whole property, plus any expenses that are exclusively related to the rental portion.
The Proration Method
The most common approach is to prorate shared expenses based on the floor area used for rental purposes relative to the total floor area of the home.
Example: A home with 2,000 square feet total, where a 600 square foot basement apartment is rented out. The rental portion is 30% of the total. The landlord can deduct 30% of shared expenses.
In some cases, both space and time matter. For example, if the room or basement was rented for only part of the year, the deductible portion should reflect both the rental-use area and the rental-use period.
Shared expenses that are typically prorated:
- Mortgage interest (not principal — only the interest portion)
- Property taxes
- Home insurance (or the rental-specific portion if separately quoted)
- Utilities (heat, hydro, water — if not separately metered and paid by the tenant)
- General maintenance and repairs that benefit the whole property
Expenses that are generally 100% deductible if exclusively for the rental unit:
- Repairs and maintenance to the rental unit specifically
- Advertising to find tenants
- Property management fees (if applicable)
- Legal fees for preparing a lease
What's Not Deductible
The principal portion of mortgage payments. Only the interest is deductible — not the repayment of the loan principal.
Personal-use expenses. Expenses that relate entirely to the owner-occupied portion of the home are not deductible.
Capital improvements to the rental portion are not expensed immediately — they're added to the Adjusted Cost Base of the property. The key distinction is between a repair (restoring to original condition, deductible) and an improvement (making it better than before, capitalized). Getting this right matters for both the current-year deduction and the eventual capital gain on sale.
If you rent to a family member or friend at below-market rent, CRA may question whether the arrangement is genuinely income-producing. In those cases, expense deductions and rental losses may be limited or denied.
The Principal Residence Exemption: The Part Most People Don't Think About
This is the area where renting part of your home most often creates unexpected tax consequences when the home is eventually sold.
How the Exemption Works
The principal residence exemption (PRE) can reduce or eliminate the capital gain on the sale of a home — but only for years during which the property qualifies as your principal residence.
For a home to qualify as a principal residence, it generally must be a housing unit that you or your family ordinarily inhabits during the year. The exemption shelters the gain for each year the property is designated.
The Partial Rental Use Issue
When you rent out part of your home while continuing to live in the rest, the tax treatment of the principal residence exemption depends on the facts. In some cases, CRA may allow the entire property to continue being treated as a principal residence where the income-producing use is ancillary to the main use as a home, no structural change has been made, and no CCA has been claimed. However, the result depends on the specific circumstances — this is not an automatic outcome.
The conditions that generally support this treatment include:
- The rental use is incidental to the use of the property as a residence
- The home has not been structurally changed in a way that makes the rental portion a clearly separate, self-contained income-producing unit
- CCA has not been claimed on the rental portion
The last point is critical. If CCA has been claimed on the rental portion, CRA's administrative position generally does not apply — and the exemption may be compromised for the rental-use portion.
CCA on the Rental Portion: Usually the Wrong Decision
Capital Cost Allowance on the rental portion of your home is technically available — but in most situations, claiming it is a decision with significant long-term consequences that outweigh the near-term benefit. In many partial-principal-residence situations, advisors recommend avoiding CCA unless the long-term consequences have been reviewed.
It can affect the principal residence exemption. Once CCA has been claimed, CRA's administrative position that the whole property can still be a principal residence generally doesn't apply. A portion of the eventual gain on sale may become taxable, regardless of how long you lived there.
The tax deferral benefit is modest. CCA on a portion of a home reduces rental income in the current year — but that reduction is temporary. When the home is eventually sold, CCA previously claimed is recaptured as income regardless of whether the property appreciated.
The recapture can be significant. If you've owned the home for many years and claimed CCA throughout, the accumulated CCA that comes back as recapture income on sale can be a meaningful number.
For many homeowners renting part of their home, the safer answer is not to claim CCA on the rental portion unless the long-term consequences have been reviewed. Preserving the conditions for the principal residence exemption is generally worth more than the modest annual CCA deduction — but this should be reviewed based on the specific situation.
The Change-in-Use Rules
When you change how you use a property — from fully personal to partially rental, or from partial rental back to fully personal — CRA has specific rules about what that change means for tax purposes.
Starting to Rent Part of Your Home
When you begin renting part of your home, a partial change in use occurs. Under CRA's administrative practice, if the conditions for the principal residence treatment are met (incidental rental use, no CCA, no structural conversion), a formal deemed disposition is generally not triggered on the rental portion. The property continues to be treated as your principal residence.
However, if the rental is more substantial — a portion of the home that has been structurally converted and is no longer part of the main residence — the change-in-use rules can trigger a deemed disposition of the rental portion at fair market value at the time of conversion. This creates a capital gain (or loss) even though no sale has occurred.
Stopping the Rental and Converting Back to Personal Use
The same logic applies in reverse. When you stop renting and convert the rental portion back to personal use, there is again a potential change-in-use event. Whether a deemed disposition occurs depends on the facts — how separate the rental use was, whether CCA was claimed, and what elections (if any) are in place.
Principal Residence Planning and Elections
Where a change-in-use is triggered, an election under subsection 45(2), subsection 45(3), or related principal residence planning may be relevant in some circumstances. The rules are technical, especially for partial changes in use, and the availability of an election can depend on the facts, timing, whether CCA has been claimed, and whether the property is moving into or out of income-producing use. This should be reviewed with a CPA before the conversion happens, not after.
We cover capital gains and deemed dispositions in more detail in our capital gains article.
Ottawa & Area: Practical Context
Basement apartments and secondary suites are extremely common in Ottawa neighbourhoods like Barrhaven, Kanata, and Orléans. Many homeowners added rental units during the period of rising property costs to help carry mortgage costs. The tax obligations attached to those units are real — even if the arrangement is informal.
Student rentals near uOttawa, Carleton, and Algonquin are another common pattern. Renting rooms to students in a home where the owner also lives is exactly the partial-rental scenario this article covers. High turnover and informal arrangements don't change the reporting obligation.
Gatineau residents or Ottawa residents with Quebec property may have Quebec tax filing or reporting considerations depending on residency and the property's location. The federal rules covered here apply in both cases, but the provincial side for Quebec properties is handled through Revenu Québec.
Ottawa's secondary suite program — the City's efforts to encourage rental housing creation through secondary suites and laneway homes — has increased the number of homeowners entering the partial-rental market. The tax obligations that come with that decision are worth understanding before the first rent cheque arrives.
What Happens When You Bring This to Majdi Ibrahim, CPA?
Getting the proration right from the start. We calculate the correct rental-use percentage, apply it consistently to shared expenses, and make sure the deductible portion is defensible and accurate — not overstated.
A clear answer on the principal residence exemption. We review the specific facts of your situation — the nature of the rental, whether CCA has been claimed, whether structural changes were made — and give you a clear picture of how the exemption applies when you eventually sell.
CCA advice that protects your long-term position. For many homeowners renting part of their home, the safer answer is to not claim CCA unless the long-term consequences have been reviewed. We explain why in the context of your specific situation and make sure you don't inadvertently compromise the PRE for a small annual deduction.
Year-end review that catches issues before they accumulate. Rental income from part of your home affects your tax return, your instalment obligations, and potentially your principal residence position. We review these together annually so nothing builds up unnoticed.
Book a consultation at www.treehousecpa.com
Frequently Asked Questions
Do I have to report income from renting out a basement apartment?
Yes. Rental income from any part of your home is taxable and must be reported on your T1 tax return using Form T776. There is no minimum income tax reporting threshold — even modest amounts from a boarder or student tenant need to be reported.
How do I calculate what portion of expenses I can deduct?
The most common method is to prorate based on the rental floor area as a percentage of total floor area. If the rental unit is 25% of the home's square footage, you can generally deduct 25% of shared expenses (mortgage interest, property taxes, insurance, utilities). Expenses that are exclusively related to the rental unit — repairs to that unit, advertising — are generally 100% deductible. In some cases, both space and time matter: if the rental was only in use for part of the year, the deductible portion should reflect both the rental-use area and the rental-use period.
Will renting part of my home affect my principal residence exemption when I sell?
It may, but not necessarily. In some cases, CRA may allow the entire property to continue being treated as a principal residence where the income-producing use is ancillary to the main use as a home, no structural change has been made that creates a clearly separate unit, and CCA has not been claimed on the rental portion. The result depends on the specific facts. If CCA has been claimed, part of the gain on sale may become taxable. This is one of the most important reasons to get the CCA question right from the start.
Should I claim CCA on the rental portion of my home?
For most homeowners, avoiding CCA on the rental portion is advisable. Claiming CCA on the rental portion of your principal residence can affect the principal residence exemption on eventual sale, and the recapture on sale can be significant. In many partial-principal-residence situations, the modest annual deduction is generally not worth the long-term cost — but this should be discussed with a CPA based on the specific situation before any CCA is claimed.
What happens if I stop renting out my basement and convert it back to personal use?
Stopping the rental and converting back to personal use is another change-in-use event. Depending on the facts — whether a formal deemed disposition was triggered when you started renting, whether CCA was claimed — there may be tax consequences on the conversion back. In some cases, a subsection 45(3) election or other principal residence planning may be relevant, but this is technical and depends on whether there was a prior deemed disposition, whether CCA was claimed, and how the property was used. This is worth reviewing with a CPA before the conversion.
Can I deduct the mortgage payment on the rental portion of my home?
Only the interest portion — not the principal repayment. The prorated share of mortgage interest (based on rental floor area as a percentage of total) is deductible. The principal portion of every mortgage payment is equity accumulation, not a deductible expense.
Do I need to report rental income from a boarder if it's just one room?
Yes. There's no exception for informal arrangements or small amounts. A boarder renting a single room generates rental income that needs to be reported. The deductible expenses will be proportionate to the rental space, so net income after expenses may be modest — but the reporting obligation still exists. If the arrangement includes significant services such as meals, regular cleaning, or other boarding-style services, the reporting treatment may need to be reviewed.
This article is provided for general informational purposes only and does not constitute personalized tax, legal, or financial advice. Tax rules are subject to change. Please consult a CPA for advice specific to your situation.
