Registering a Second Unit Rental in Ontario: Legal Requirements

Renting a basement or another unit in your home can help with the mortgage, but it comes with zoning, building, fire safety and tenancy rules.

This article walks through the main points in the order most homeowners meet them, and it ends with the tax issues that follow from earning rent.

Zoning and planning

Planning Act s. 16(3) requires municipalities to adopt official plan policies that allow additional residential units, both in the main home and in another building on the same property. That does not mean every property qualifies. Local zoning, servicing and recent changes to the planning rules can affect your lot, so confirm with your municipality before you spend money.

Permits and inspections

Adding a second unit in a house requires a building permit from the local building department. The electrical work needs a separate permit and an inspection by the Electrical Safety Authority (ESA).

Do the permit first. Work done without one can be hard to legalize later, and a buyer or insurer may ask for proof.

Fire and safety requirements

Fire Code amendment O. Reg. 87/25 adds new smoke alarm requirements for existing two-unit residential occupancies and takes effect January 1, 2026, with a few exceptions. Check the details with your local fire department.

Licensing and being a landlord

Whether a rental unit needs a licence or registration depends on the by-law of your local municipality, and a municipality may set up a licensing system for a business under the Municipal Act, 2001 s. 151(1). Because the rules differ from place to place, Ontario's second-unit guide tells homeowners to ask their municipality whether a second unit must be licensed or registered.

Once you rent the unit, the Residential Tenancies Act, 2006 applies despite any agreement to the contrary. It does not apply where the occupant must share a bathroom or kitchen with the owner or the owner's spouse, child or parent who lives in the same building, but a self-contained basement apartment is not covered by that exemption. For most private rentals, landlords must use the Ontario standard lease for new leases.

Tax on rental income and sale

Selling a rental property for more than it cost may produce a capital gain, reported on Schedule 3, Capital Gains or Losses. For 2025, the capital gains inclusion rate is generally one-half. The proposed increase to two-thirds was cancelled. Check the CRA pages for the year of sale.

• Capital cost allowance you claimed earlier that exceeds the undepreciated balance when you sell is a recapture, added to income in full rather than at the inclusion rate.
• Selling a rental building cannot produce a capital loss, though a terminal loss may be deductible in some cases.
• Legal fees on the sale are deducted from the proceeds, not claimed as a rental expense.
• If you sell a principal residence that was partly rented, you split the price between the residence part and the rental part.

What to do next

• Ask your municipality about zoning, licensing and registration for your address.
• Apply for the building permit and the separate electrical permit before work starts.
• Plan for fire separation, smoke alarms and carbon monoxide alarms.
• Check whether the Ontario standard lease applies to your rental, and keep records of income and costs.
• Speak with an accountant about tax and a lawyer about the rules for your property.

Frequently asked questions