Renting out a room or a suite in the home you live in doesn’t automatically cost you the principal residence exemption. Whether the whole home stays exempt depends on three conditions the CRA sets out; when they aren’t met, the rented part is treated as changed to a rental and only the home part of the gain is exempt. This page is part of the real estate tax hub.
Short Answer
Renting out part of your home keeps the whole home a principal residence only if the rental is ancillary to your use of it as a home, you make no structural change to it, and you claim no capital cost allowance on it; otherwise the rented part is treated as changed to a rental, and only the home part of the gain is exempt when you sell.The Three Conditions
- The rental use is ancillary to the main use of the property as your home.
- You make no structural change to the property.
- You claim no capital cost allowance (CCA) on the property.
The CRA’s line 12700 page words the first condition as rental or business use that is relatively small in relation to the home’s use as your principal residence. Its folio on principal residences gives examples that can meet all three: caring for children in the home as a business, renting one or more rooms, or an office in the home used for a business or employment. In those cases you report the income and can claim the expenses, other than CCA, for the part used to earn income.
When the Conditions Aren’t Met
The folio’s examples of a structural change: converting the front half of a house into a store, converting part of a house into a self-contained unit to rent out (a duplex, triplex and so on), and altering a house to make separate business premises.
In those cases you report the income and can claim a reasonable share of the expenses for the whole property, and capital cost allowance on the converted part.
What happens to the exemption:
| When | What happens |
|---|---|
| The use changes | You are considered to have sold the rented part, and reacquired it, at its share of the property’s fair market value. That year you can designate that part as your principal residence on Part 2 of Schedule 3 and page 2 of Form T2091(IND). |
| The use changes (alternative) | Since March 19, 2019, you can elect under subsection 45(2) that the deemed sale on a partial change in use doesn't apply. |
| You start claiming CCA later | The folio applies the deemed sale as of the time the rental use began. |
| You sell | If the conditions aren't met, when you sell you split the price and adjusted cost base between the home part and the rented part on a reasonable basis, such as floor area or number of rooms, and report the gain on the rented part. |
The gain on the rented part goes on line 13800 of Schedule 3. The building part is depreciable property, so this also applies: When you sell a rental building for more than its undepreciated capital cost (UCC), the difference, counting the sale price only up to the building's original cost, is recaptured CCA and added to your income in full; a sale above the original cost is also a capital gain, and if no property is left in the class and some UCC remains, that remainder is a terminal loss you deduct.
Splitting the Gain: an Example
The figures below are made up, and the rates come from data. The example follows the CRA’s own duplex example: the owner rented part of the home from the day it was bought, so there was no change in use, and the rented share is set by floor area.
A couple bought a home for $500,000 and from the start rented out a self-contained unit that is 40% of the floor area. They sell for $900,000, with no selling costs, and they claimed no CCA.
| Step | Calculation | Result |
|---|---|---|
| Total gain | $900,000 − $500,000 | $400,000 |
| Gain on the rented part | $400,000 × 40% | $160,000 |
| Gain on the home part (exempt if designated for every year) | $400,000 − $160,000 | $240,000 |
| Taxable capital gain | $160,000 × 50% inclusion rate | $80,000 |
In a real sale, the rented part’s price and cost are also divided between land and building, because the building part can produce recaptured CCA or a terminal loss, as in the CRA’s worked example.
Renting Out the Whole Home
Moving out and renting the entire home is a full change in use, covered in the guide to converting your home to a rental. In short:
Turning your home into a rental is a deemed sale at fair market value, but you can elect under subsection 45(2) of the Income Tax Act not to be treated as having changed its use: you then can't claim capital cost allowance on it, you still report the net rental income, and you can keep designating it as your principal residence for up to four years (longer for some work relocations) as long as you designate no other home and stay resident in Canada.Filing When You Sell
| Form | When |
|---|---|
| Schedule 3 | The year you sell (or are considered to have sold) the home, even when the whole gain is exempt |
| Form T2091(IND) | With Schedule 3, to designate the home and work out any gain to report |
| Form T776 | Each year you have rental income from the rented part |
If you forget to designate in the year of the sale, the CRA can accept a late designation in certain circumstances, with a penalty of the lesser of $8,000 and $100 for each complete month from the original due date (CRA).
Related Reading
Sources
The figures and rules on this page come from these sources, last checked against them between September 23, 2026 and October 1, 2026. How we check facts.
- Canada Revenue Agency: Principal residence
- Canada Revenue Agency: Capital Gains – 2025
- Canada Revenue Agency: Rental Income
- Canada Revenue Agency: Reporting the sale of your principal residence for individuals (other than trusts)
- Canada Revenue Agency: Income Tax Folio S1-F3-C2, Principal Residence