How do I report rental income from my basement suite in Canada?

Rental income from a basement suite or rented room is reported on Form T776 (Statement of Real Estate Rentals) as part of your T1 return, unless you also provide substantial services (like meals or regular cleaning) — in which case it would be business income on T2125. Report gross rent received; deduct your eligible expenses (proportionate share of mortgage interest, property taxes, insurance, utilities, maintenance); carry the net income to line 12600 of your return.

Does renting out my basement affect my Principal Residence Exemption?

It depends on the extent of rental use. If you rent out a room or basement suite while continuing to live in the home as your main residence, CRA will typically allow the full Principal Residence Exemption on sale — provided the rental use is "ancillary" to the property's main purpose as your home. If the rental converts the character of the property (e.g., you only use it occasionally and it's primarily rented), you may lose full PRE protection. A Section 45(2) election can preserve the PRE in some situations.

What expenses can I deduct when renting out part of my home?

You can deduct a proportionate share of: mortgage interest, property taxes, home insurance, utilities (electricity, gas, water), internet (if provided to the tenant), maintenance and repairs specific to the rental area, and depreciation (CCA) on the rental portion. The proportion is typically calculated as (rental area square footage ÷ total home square footage). Only expenses attributable to the rental portion are deductible.

Do I need to charge HST/GST when renting a basement suite?

No. Long-term residential rentals (where a tenant lives in a unit on a monthly or annual basis) are exempt from GST/HST. You do not collect GST/HST on rent, and you cannot claim input tax credits on your rental expenses. This exemption applies regardless of your total rental income. Short-term rentals under 30 days are taxable — see the Airbnb tax rules guide if you do short-term accommodation.

If I claim CCA on my rental basement, what happens when I sell the house?

Claiming CCA on the rental portion of your home creates two complications when you sell. First, any CCA previously claimed is subject to income recapture — taxed at your full marginal rate, not as a capital gain. Second, the capital gain on the rental portion may be partially taxable (to the extent the PRE does not cover those years). Most tax advisors recommend not claiming CCA on a primary residence with a rental suite unless you have no intention of ever selling, specifically to avoid these complications.

Do I need a licence to rent out my basement in Toronto or Vancouver?

Yes. Both Toronto and Vancouver require a short-term rental licence for STRs (under 30 days). For long-term basement suite rentals, a business licence may be required in some municipalities. Additionally, many municipalities require a rental suite to meet specific zoning, fire code, and building code requirements before tenants can legally occupy the space. Check with your specific municipality before renting.

Renting Out Part of Your Home in Canada: Tax Rules (2026)

The “Accidental Landlord” Scenario

Many Canadians become part-time landlords when they:

Finish a basement and rent it out to offset mortgage costs
Rent a spare bedroom to help cover housing costs
Temporarily rent their home while working abroad
Inherit a property with a rental suite already in place

In all these cases, the rental income must be reported to CRA and the tax rules are more nuanced than simply reporting the income.

Proportionate Allocation: The Foundation of Home Rental Tax Calculations

When you rent part of your home, you allocate expenses between personal use and rental use. The most common method is floor space:

$$\text{Rental portion} = \frac{\text{Rental suite square footage}}{\text{Total home square footage}}$$

Example:

2,000 sq ft home with a 600 sq ft basement suite
Rental portion: 600 ÷ 2,000 = 30%
You can deduct 30% of qualifying whole-home expenses as rental expenses

Some expenses are specific to the rental unit only (repairs inside the suite, appliances for the tenant) and are 100% deductible. Shared expenses (mortgage interest, property taxes, insurance) use the proportionate method.

What You Can Deduct

100% Deductible (Rental-Specific)

Repairs and maintenance specific to the rental unit
Appliances purchased solely for the tenant’s use (claimed as CCA)
Advertising costs to find tenants
Professional fees related to the rental (e.g., lease drafting)
Commission to a rental agent

Mortgage interest — rental % of annual interest paid (not principal)
Property taxes — rental % of annual tax bill
Home insurance — rental % of annual premium (check that your policy covers rental use — many standard policies do not)
Utilities — rental % of electricity, gas, and water; or track actual usage if separately metered
Internet — if provided to tenant, rental % of the bill
Maintenance and repairs — rental % of whole-home repairs (roof, siding, furnace)

Capital Expenditures (CCA)

Appliances installed for the tenant (stove, refrigerator) — CCA Class 8, 20% declining balance
Separate entrance construction — capital improvement, added to your home’s cost base
Renovation costs to create the rental suite — capital or repairs depending on nature

Form T776: Statement of Real Estate Rentals

Report rental income on Form T776 each year, even if income is modest. Key fields:

T776 Section	What to Enter
Property address	Your home address
Ownership percentage	Your share if co-owned
Gross rents received	Total rent collected
Insurance expense	Rental % of annual premium
Mortgage interest	Rental % of annual interest
Property taxes	Rental % of tax bill
Repairs and maintenance	Rental-specific costs + rental % of whole-home
Utilities	Rental % or actual rental share
CCA	Rental portion of eligible Class 1/8/10 assets
Net income or loss	Flows to T1 line 12600

Rental loss: If your deductible expenses exceed your rental income in a year, you have a rental loss. Rental losses from a suite in your principal residence can be applied against your other income, subject to the reasonable expectation of profit test. CRA can challenge persistent losses if the rental activity does not have a genuine commercial purpose.

The Principal Residence Exemption and Basement Suites

This is the most significant long-term tax consideration for Canadians renting part of their home.

The Basic Risk

When you rent part of your home, you may trigger a change-in-use for the rented portion. CRA may take the position that the rental portion is no longer covered by the full Principal Residence Exemption when you eventually sell.

CRA’s Practical Position: “Ancillary Use”

CRA’s administrative policy (IT-120R6, and now interpreted through guidance) allows the full PRE on sale when:

The rental use is “ancillary” to your main use of the property as your personal residence
You have not structurally altered the property to make a self-contained rental unit
You would not otherwise claim CCA (depreciation) on the rental portion

If the basement already had a separate entrance, separate kitchen, and separate bathroom before you moved in, CRA may challenge the “ancillary use” position.

When the Full PRE Is at Risk

The full PRE becomes uncertain when:

You extensively renovated to create a separate self-contained unit
You use the property primarily for rental (you live in a small part, tenant has most of the home)
You have been claiming CCA on the rental portion

If the full PRE is not available, the capital gain on sale is split proportionately:

Rental % of the gain → taxable capital gain (50% inclusion, or 2/3 above $250K)
Personal % of the gain → exempt under PRE

Section 45(2) Election: Preserving the Full PRE

If you stop using part of the home as a rental, you can file a Section 45(2) election. This election:

Defers the change-in-use deemed disposition
Allows you to designate the property as a principal residence for up to 4 additional years
Requires that you did not claim CCA during the rental period

If you plan to eventually sell and depend on the full PRE, not claiming CCA is usually the right strategy — even though it means giving up rental deductions now.

Provincial Considerations

Ontario

Secondary suites must comply with the Ontario Building Code and local zoning bylaws
Many municipalities (Toronto, Ottawa, Hamilton) have specific secondary suite regulations
Some municipalities offer grants or loans for basement suite creation that serve affordable housing priorities
Short-term rentals (Airbnb) in a principal residence are permitted in most cities but require a licence

British Columbia

Laneway homes and secondary suites are common in Greater Vancouver
BC’s Speculation and Vacancy Tax applies to properties not used as a principal residence — a suite in your occupied home is generally exempt
Short-term rental rules in BC were tightened in 2023: all STRs must be in the host’s principal residence in most municipalities

Insurance: A Critical and Often Missed Step

Standard home insurance policies typically do not cover rental activities. If you are renting out a basement suite and have a house fire or flood, your insurer may deny the claim if you did not disclose the rental use.

Before you place your first tenant:

Call your insurer and disclose the rental suite
Get confirmation of coverage in writing
If your insurer does not cover rental suites, get a homeowner’s policy with landlord coverage

The additional premium is generally modest ($150–$400/year for a suite), and the rental income is tax-deductible. The cost of losing a home insurance claim is catastrophic.

CCA: Should You Claim It?

The short answer for most homeowners with a rental suite: probably not.

Claiming CCA:

Reduces rental income in the current year (tax deferral benefit)
Creates recapture income on sale (taxed at full marginal rates)
May jeopardize the Section 45(2) election and full PRE on the entire home

The only scenario where claiming CCA clearly makes sense is if you have determined you will never sell (and will pass the property to heirs at death), or if you intend to always rent and have structured your affairs accordingly with professional advice.