Certain circumstances, such as converting your home into a rental, may lead to all or some of the principal residence exemption to be disqualified.

This blog focuses on the rules related to renting out only part of your home, may it be just 1 room or your basement.

Tax payers who rent out space in their home while still maintaining it as their primary home are allowed to claim the principal residence exemption on capital gains upon disposition, as long as all 3 conditions set forth by the CRA are met as listed below.

  1. The rental use of the home is “relatively small” in relation to its use as your principal residence;

  2. There have not been any structural changes to the property to make it more suitable for rental purposes; and

  3. You do not deduct any Capital Cost Allowance (CCA) on the part of the home used as a rental.

If you do not meet all the above then the CRA may consider your property is ineligible for the 100% principal residence exemption, and therefore you would owe taxes on future disposition of the home.

The CRA will deem that there has been a change in use of the home and that you have “sold” that portion of your home and immediately reacquired it. You will be required to take the principal residence exemption when you dispose of the property the price of your home will be divided between space used as your residence versus that which was used as rental space years of rental usage against the years of ownership. The CRA allows the rental portion split to be determined using square meters or the number of rooms, but must be considered reasonable.

The capital gains on the portion you rented out must be reported and you can take the principle residence exemption for the portion that was not used for rental income. The same also applies if you stop renting the space out and convert it all back to residential use.

Don’t forget, you are required to report your rental income and expenses on your tax return annually!

 

The above information is of a general nature only and should not be relied upon for specific situations.  We do not endorse the accuracy of the charts on the websites above.  Click here for additional tax accounting services information. 

Call Marlies Y Hendricks, CPA at 416-766-3941 to discuss your best options and set up an appointment.