What happens if I rent out part of my home in Ontario — do I lose the principal residence exemption?

Renting part of your home does not automatically cost you the principal residence exemption, but it can limit it. If you use part of the home to earn income, you split the selling price and adjusted cost base between the two uses on a reasonable basis, such as square metres or number of rooms. Only the gain on the income-producing part is reported, on line 13800 of Schedule 3.

The CRA generally keeps full principal residence treatment where the rental use is ancillary to the home's main use as a residence, there is no structural change, and no CCA is claimed. If you do claim CCA, rental buildings are generally Class 1 (4%) and land is not depreciable. On a sale, any recapture of CCA is reported on Form T776 and the sale on Schedule 3.

Rental income itself is reported on Form T776. Whether your rental is small and secondary enough to keep full treatment depends on the facts, so it is worth confirming with a lawyer or accountant before you claim CCA or sell.