Renting out part of your home

Rent you collect for a room, a basement suite or another part of your home is income you report on your return, and you can deduct the share of your home costs that relates to the rented space. If the rental stays small, you make no structural changes for it and you don’t claim capital cost allowance, the whole home can usually stay covered by the principal residence exemption.

Is it rental income?

Renting out space in your home usually gives you income from property, which you report on Form T776, Statement of Real Estate Rentals. That’s the case when you provide only basic services such as heat, light, parking and laundry. If you also provide extra services like cleaning, security or meals, you may be running a business instead, and the business-income rules in Guide T4002 apply. The more services you provide, the more likely it’s a business.

Some arrangements aren’t rentals at all. If your son or daughter, or someone else living with you, pays a small amount toward groceries or the upkeep of the house, that’s cost sharing: you don’t report it as income, and you can’t claim rental expenses or a loss.

Expenses you can deduct

When you rent part of the building you live in, split the costs that apply to the whole property between the part you rent out and the part you use yourself. You can base the split on floor area (square metres) or on the number of rooms, as long as it’s reasonable.

• Costs for the whole property, such as property taxes, insurance and electricity: deduct the rental share. For example, if you rent out 2 rooms of an 8-room house, you deduct a quarter of these costs.
• Costs only for the rented space, such as repairs to the rented room or advertising for a tenant: deduct them in full.
• Shared rooms with a roommate or lodger, such as the kitchen and living room: you can also deduct part of their costs, based on things like how many people use the room or how much of the time your roommate uses it.

You can deduct interest on money borrowed to buy or improve a rental property, but only the rental share applies when you live in the rest of the building. Spending that improves the property beyond its original condition, or extends its useful life, is usually a capital expense, not something you deduct all at once.

Two limits to know:

• You can’t claim expenses for renting part of your home if you have no reasonable expectation of making a profit.
• If you rent to someone you know for less than you’d charge a stranger, you can’t claim a rental loss.

If your expenses are more than your rent and you incurred them to earn income, the rental loss can be deducted from your other income.

Short-term rentals

A short-term rental is a residential property rented, or offered for rent, for less than 90 consecutive days at a time. If your province or municipality doesn’t allow short-term rentals at your location, or requires a registration, licence or permit that you don’t have, you can’t deduct the expenses for the days the rental wasn’t compliant. Check your local rules before you list a room.

Be careful with capital cost allowance

Capital cost allowance (CCA) is the yearly deduction for wear and tear on the building. For the rented part of your home, you can claim CCA only if it doesn’t create or increase a rental loss and you aren’t designating the building as your principal residence.

That second condition is the catch. The CRA treats your whole home as staying your principal residence, even with the rental, only if all three of these are true:

• the rental use is small relative to your use of the property as your home
• you make no structural changes to make it more suitable for renting
• you claim no CCA on the rented part

If any of these isn’t true, you’re generally treated as having sold the rented portion at its fair market value and bought it back. Later, part of your gain on selling the home can be taxable. Since March 19, 2019, you may be able to file an election so that this deemed sale doesn’t happen, depending on your situation.

When you sell

If part of your home stopped qualifying as your principal residence, you split the selling price between the home part and the rented part, using square metres or the number of rooms. You report a capital gain only on the rented part, and you may also have to add back past CCA as income (a recapture). The part you lived in stays sheltered. See the principal residence exemption for how the designation works.

What to do

• Keep records of rent received and every expense. Records generally have to be kept for six years from the end of the tax year they relate to.
• Fill out Form T776 each year, splitting shared costs in a reasonable way.
• Before claiming CCA on the rented part of your home, remember that it can make part of your gain taxable when you sell.
• To estimate the tax on your net rental income in your province, use the income tax calculator.