Does a basement suite affect my principal residence exemption?

It depends. If the suite is incidental to your main residence (small portion, occasional rental), the full PRE may apply. If the suite is significant (large, commercial character, always rented), CRA may apportion the capital gain, making the suite portion taxable.

What percentage of expenses can I deduct for a basement suite?

Calculate the percentage based on square footage or number of rooms. If your suite is 700 sq ft and your home is 2,800 sq ft, you can deduct 25% of shared expenses (mortgage interest, property tax, insurance, utilities) plus 100% of suite-specific costs.

Do I have to report basement suite income if it's just helping with the mortgage?

Yes. Rental income must be reported regardless of amount or purpose. The good news is you can deduct expenses, often resulting in little or no net taxable income. Not reporting rental income can lead to CRA penalties.

Basement Suite Income in Canada: Tax Guide and Rental Tips (2026)

Rental Income Basics

What to Report

Income Type	Reportable
Monthly rent	Yes
Last month’s rent deposit	Yes (in year received)
Parking fees	Yes
Laundry income	Yes
Utility reimbursement	Yes (if tenant pays separately)

When to Report

Filing	Details
Tax return	Form T776 - Statement of Real Estate Rentals
Due date	April 30 (or June 15 if self-employed)
Installments	May be required if net rental income is significant

Deductible Expenses

Shared Expenses (Proportionate)

Expense	Deduction
Mortgage interest	% of suite
Property tax	% of suite
Home insurance	% of suite
Hydro/Gas	% of suite (or actual if metered)
Water	% of suite
Common repairs	% of suite

Suite-Specific Expenses (100%)

Expense	Deduction
Suite repairs	100%
Suite appliances	CCA (20%)
Advertising	100%
Rental agent fees	100%
Credit checks	100%
Suite insurance rider	100%
Suite-only utilities	100%

Non-Deductible

Expense	Why Not
Mortgage principal	Not an expense
Personal portion of expenses	Not rental-related
Your own labour	Can’t pay yourself
Capital improvements	Added to cost base (not current deduction)

Calculating Your Deduction Percentage

Square Footage Method

Area	Calculation
Basement suite	700 sq ft
Total home	2,800 sq ft
Rental percentage	25%

Example Annual Deductions

Expense	Total	Rental (25%)
Mortgage interest	$20,000	$5,000
Property tax	$5,000	$1,250
Insurance	$1,800	$450
Utilities	$3,600	$900
Suite repairs	$800	$800 (100%)
Total deductions	—	$8,400

Net Rental Income

Calculation	Amount
Gross rent ($1,500 × 12)	$18,000
Less: Deductions	$8,400
Net rental income	$9,600

This $9,600 is added to your other income and taxed at your marginal rate.

Capital Cost Allowance (CCA)

Should You Claim CCA?

Consider	Details
Building CCA	4% on building (not land)
Appliances CCA	20% on appliances/furniture
Recapture on sale	CCA claimed is taxed back when you sell
PRE impact	May complicate exemption

Recommendation: Most homeowners with basement suites should NOT claim CCA on the building to avoid complications with principal residence exemption.

Principal Residence Exemption Impact

CRA’s View

Scenario	PRE Treatment
Small suite, incidental	Full PRE likely preserved
Large suite, commercial character	PRE may be apportioned
Suite has structural separation	Higher risk of apportionment
Consistently rented, significant income	Higher risk

Minimizing PRE Impact

Strategy	How
Keep records	Document primary use is personal residence
Don’t over-claim CCA	Especially on the building
Use suite occasionally	Show it’s not purely commercial
Professional advice	Consult tax accountant

Legal Requirements

Provincial Regulations (Sample)

Requirement	Details
Fire separation	Usually 45-60 minute rating
Smoke/CO detectors	In suite and common areas
Egress window	Minimum size for bedroom
Ceiling height	Minimum 6'5" - 7'0"
Separate entrance	Often required
Building permit	Required for new suite

Landlord-Tenant Laws

Area	Governed By
Ontario	Residential Tenancies Act
BC	Residential Tenancy Act
Alberta	Residential Tenancies Act

Key provisions:

Standard lease requirements
Rent increase limits
Eviction procedures
Security deposits

Setting the Right Rent

Market Research

Method	How
Comparable listings	Check Kijiji, Craigslist, Facebook
Rental sites	Rentals.ca, Zumper
Property management	Ask local companies

Pricing Factors

Factor	Impact
Private entrance	+$100-200/month
Utilities included	+$100-150/month
Parking	+$50-150/month
Laundry	+$25-50/month
Modern finishes	+$100-200/month

Record Keeping

What to Keep

Document	Retention
Lease agreements	Duration + 6 years
Rent receipts/records	6 years
Expense receipts	6 years
Mortgage statements	6 years
Utility bills	6 years
Repair invoices	6 years
CCA schedules	Until property sold + 6 years

Common Mistakes

Mistake	Correction
Not reporting income	Always report
Overclaiming expenses	Use accurate %
Claiming CCA without understanding implications	Consult professional
No documentation	Keep all receipts
Illegal suite	Legalize or understand risks