Does Working From Home Affect the Principal Residence Exemption in Canada?

Many people now work from home and deduct a share of home expenses. A common worry is that this will cost you the tax-free sale of your home later.

Often it does not, but the details matter, especially whether you claim capital cost allowance (CCA). This article explains the general rules in Canadian federal tax law.

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

Home office use and the exemption

If part of the home is used for business and no CCA is claimed on it, the home can still be fully designated. Expenses other than CCA may be claimed, subject to the conditions in Folio paragraph 2.60.

Claiming CCA on the business part can cost the exemption for that part. CCA is the tax depreciation deduction, so it is the claim to think hard about.

When a change in use is triggered

A full change in use, such as a home becoming a 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.

For a partial change in use, such as a rented room or a home office, there is no deemed disposition if the rental or business use is relatively small, there are no structural changes and no CCA is claimed.

Elections if the rules would otherwise apply

On a change from personal use to income-producing use, 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.

Since 19 March 2019 a 45(2) or 45(3) 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

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.

What to do next

• Check whether you have ever claimed CCA on any part of the home.
• Keep records of the space used for business and any renovations.
• Consider whether a 45(2) election letter is needed for the year of a change in use.
• Report the sale on Schedule 3 and designate the property, even if the gain is fully exempt.
• Ask an accountant or lawyer before claiming CCA or changing how the space is used.

Frequently asked questions