Can I claim the principal residence exemption on a home I partly rented out in Canada?
This answer covers Canadian federal tax law, which applies in every province.
Renting out a basement suite or a room does not automatically cost you the principal residence exemption. For a partial change in use, there is no deemed disposition if the rental or business use is relatively small, there are no structural changes and no capital cost allowance (CCA) is claimed.
Otherwise, a change in use is a deemed sale at fair market value and an immediate reacquisition at the same amount, which becomes your new cost base; for a partial change, the proportionate share of fair market value is used. You can elect under subsection 45(2) that there be no deemed disposition, by attaching a signed letter to the return for the year of the change. Since 19 March 2019 that election is also available for a partial change in use.
The election is not available if CCA was claimed on the property after 1984 and on or before the change in use. If part of the home earned income, the selling price and adjusted cost base are split by square metres or number of rooms, if the split is reasonable. Your facts matter, so a lawyer or accountant can confirm where you stand.
Key takeaways
- A small rental or business use, with no structural changes and no CCA claimed, does not cause a deemed disposition on a partial change in use.
- Otherwise, a change in use is a deemed sale at fair market value and a reacquisition at the same amount, which becomes your new cost base.
- A subsection 45(2) election, made by a signed letter with the return for the year of the change, can avoid the deemed disposition, but not if CCA was claimed after 1984 and on or before the change.
- If part of the home earned income, the selling price and adjusted cost base are split by square metres or number of rooms, if the split is reasonable.