Principal Residence Exemption for a Duplex or Basement Suite in Canada

You live in a duplex or a house with a basement suite and rent out the other part. When you sell, you want to know whether the whole gain is exempt, whether part of it is taxable, and whether renting triggered a sale for tax purposes years ago.

The Canada Revenue Agency (CRA) applies general rules to these situations. The details turn on your facts, so this article explains the framework and the points to raise with an accountant or lawyer.

This article covers Canadian federal tax law, which applies in every province.

Two separate questions

First, was there a change in use when you started renting? Second, if only part of the property qualifies, how is the sale split? A change in use, such as home to rental, is a deemed disposition at fair market value and an immediate reacquisition at the same amount, which becomes the new cost base. For a partial change, the proportionate share of fair market value is used.

Renting part of your home

For a partial change in use, such as a rented room, there is no deemed disposition if the rental use is relatively small, there are no structural changes and no CCA is claimed. Since 19 March 2019, a 45(2) or 45(3) election is also available for a partial change in use.

Whether a basement suite or the other half of a duplex is relatively small is a question of fact, and a lawyer or accountant can help you assess it.

Splitting the sale between home and rental

Where only part of a home is the principal residence and the rest earned income, the selling price and adjusted cost base are split by square metres or number of rooms, if the split is reasonable. A gain on an income-producing portion goes on line 13800 of Schedule 3.

Half of a capital gain is taxable. The gain is proceeds of disposition minus adjusted cost base and the outlays and expenses of the sale. If the home is sold as land and building, the selling price must be split between them on Schedule 3.

Moving out and renting the whole place

If you move out and the whole home becomes a rental, you can elect under subsection 45(2) that there be no deemed disposition. You attach a signed letter to the return for the year of the change, describing the property and citing subsection 45(2). No CCA can be claimed on the property, and you may designate it as your principal residence for up to four years while it earns income, if you do not designate another property and remain a Canadian resident.

• The election is not available if CCA was claimed on the property after 1984 and on or before the change in use.
• If you move back, a subsection 45(3) election postpones the deemed disposition until actual sale. It allows up to four prior years to be designated, but not if CCA was claimed.
• The four-year limit can be extended indefinitely in certain employer-relocation cases.

What to do next

• Write down when each part of the property was rented and what share of the home it represents.
• Confirm whether any CCA was ever claimed on the rental part.
• List any renovations that changed the structure when the suite was created.
• Keep the purchase, improvement and selling records that support your adjusted cost base.
• Report the sale on Schedule 3 and complete Form T2091(IND), even if the gain is exempt.

Only one property per family unit can be designated for each year from 1982 onward, so consider other properties your family unit owns.

Frequently asked questions