Renting Part of Your Home in Ontario: Tax Implications for Homeowners

Renting out a spare bedroom, a finished basement, or an in-law suite can be a smart way to offset your mortgage. But renting part of your home under Canadian tax law creates reporting obligations and some risks that catch a lot of Ontario homeowners off guard — especially when they eventually sell. Understanding the rules around renting part of your home tax Canada-wide (with Ontario-specific nuances) can save you from a nasty surprise at tax time or on closing.

This guide walks through the key rules in plain language. We recommend working with a licensed accountant for your actual filings — the facts of your situation matter a great deal, and a professional can make sure you claim every deduction you are entitled to while staying onside with CRA.

You Must Report Rental Income on Form T776

If you receive rent for any part of your home, that income is taxable. CRA requires you to report it on Form T776 — the Statement of Real Estate Rentals — and file it with your personal T1 return each year.

There is no minimum threshold below which rental income is exempt. Even if you rent a room to a family member for a modest amount, it counts. The bright side is that you can deduct a prorated share of many of your home expenses against that income, which often reduces your net rental income significantly.

Calculating the Rental Portion: The Square Footage Method

The most common and CRA-accepted approach is to calculate the percentage of your home's total floor area that the rental space occupies, then apply that percentage to shared expenses.

For example, if your home is 2,000 square feet and the basement suite is 500 square feet, the rental portion is 25 percent. You can then deduct 25 percent of qualifying shared household expenses.

Some people also factor in the number of rooms rather than square footage, particularly in shared-space arrangements where a tenant has access to the whole house. Either method can work — what matters is that it is reasonable and consistent. CRA expects you to use the same method year over year.

Expenses You Can Prorate Against Rental Income

Once you know your rental percentage, you can apply it to the following expenses (as of writing — confirm with CRA or an accountant for current guidance):

• Mortgage interest (not the principal repayment — only the interest portion)
• Property taxes
• Home insurance premiums
• Utilities (heat, hydro, water) if you pay them and the tenant does not
• General maintenance and repairs that benefit the whole property

For each of these, multiply the total annual cost by your rental percentage to arrive at the deductible amount.

Expenses Specific to the Rental Area

Some expenses relate exclusively to the rented space and are fully deductible without proration:

• Repairs or renovations done only to the rental unit (repainting the basement, fixing a tenant's appliance)
• Advertising costs to find tenants
• Tenant-specific insurance riders
• Legal fees related to the tenancy

Keep receipts and invoices for everything. If CRA audits your return, you will need documentation to support every deduction you claim.

The Principal Residence Exemption: Where Things Get Complicated

This is the part most homeowners do not think about until they are about to sell — and by then it may be too late to plan around it.

Canada's principal residence exemption (PRE) shelters the gain on your home from capital gains tax when you sell. The key condition is that the home must be your principal residence for each year you are claiming the exemption. Partial rental use can complicate this.

The general rule: CRA will generally allow you to continue claiming the PRE for your entire home — including the rented portion — if the rental use is incidental to your use of the property as your home, and if you have not made structural changes that would suggest the property has fundamentally changed in character.

The risk: If the rental is more than incidental — for example, you have converted most of the home to rental use, or you operate the space in a commercial manner — CRA may treat part of the property as having undergone a "change in use." This can mean a deemed disposition at fair market value and a partial loss of the PRE.

For most basement-suite landlords who occupy the majority of the home and use the suite to help cover costs, the PRE is generally intact. But the line is not always obvious, and your circumstances may differ.

The Change-in-Use Rules

A "change in use" occurs when a property (or part of it) shifts from personal use to income-producing use, or vice versa. Under the Income Tax Act, a change in use can trigger a deemed disposition — meaning CRA treats you as having sold and immediately reacquired that portion of the property at fair market value.

The practical effect: if the rental portion has increased in value since you bought the home, you could face a capital gains inclusion on that unrealized gain at the time of the change. Again, confirm the current inclusion rate with your accountant, as rates can change.

There are elections available to defer or manage change-in-use consequences, but they must be filed correctly and on time. This is one of the strongest reasons to get professional advice before you start renting, not after.

Capital Cost Allowance: A Deduction That Usually Backfires

You are technically permitted to claim Capital Cost Allowance (CCA) — tax depreciation — on the rental portion of your home. This reduces your net rental income and your current-year tax bill.

However, claiming CCA on your home is almost always a mistake for owner-occupiers. Under current CRA rules, claiming CCA on any portion of your principal residence means that portion no longer qualifies for the PRE in the years CCA is claimed. The long-term capital gains exposure from losing the exemption almost always outweighs the short-term deduction benefit.

Unless you have unusual circumstances, most accountants will advise you to skip CCA on your home. Ask yours explicitly.

Basement Suites: The Most Common Ontario Scenario

Basement suites are far and away the most common partial-rental arrangement in Ontario. They are generally treated favourably by CRA as long as:

• You live in the upper portion as your primary home
• The rental income is reported each year on T776
• You claim only a reasonable prorated share of expenses
• You do not claim CCA on the rental portion

If you are thinking about converting a basement and want to understand the tax implications before you start — or if you have been renting and are now preparing to sell — legal and accounting advice at either end of the process is well worth the cost.

Keeping Good Records

CRA can request documentation going back several years. Build the habit of keeping:

• Annual T776 filings and supporting receipts
• Lease or rental agreements for each tenant
• Proof of payment for all expenses you deduct (invoices, bank statements)
• A record of the square footage calculation you used

Good records protect you in an audit and make annual filings much faster for your accountant.

Frequently asked questions