All the Numbers

Renting out part of your home

From the All the Numbers wiki · Housing

A home with a suite, a rented room, a duplex side or a triplex unit is lived in and rented at once. Two separate sets of rules apply. One taxes the rent as it comes in; the other decides how much of the gain on a sale stays tax-free under the principal-residence exemption. This entry is about the second, and how the first connects to it.

The tax on the income

Rent is income. Expenses attributable to the rented portion — interest, property tax, insurance, utilities, maintenance — are deductible against it, and the tax lands at your own marginal rate, on top of your salary. The rent counted is the rent actually earned in the year; a vacant month is simply rent that did not arrive, not a separate deduction.[1] The details are in renting out a suite.

The tax at the sale

This is the part people miss. CRA folio S1-F3-C2 keeps the full principal-residence exemption only while all three hold:[2]

  1. the rental use stays ancillary to living there,
  2. there is no structural change creating a self-contained unit, and
  3. no capital cost allowance is claimed.

A self-contained suite is the folio's own example of a structural change (¶2.58). If one exists, the full exemption is gone and the tax at sale is real.[3] What the tax law then does is described in change of use: the rented share is treated as sold at its market value on the day the use changes, unless an election is available.[4] Half of any gain left over is taxed, as for any capital gain.[5]

What the engine does

  • Taxes suite income annually, on the year rather than the month, as the CRA assesses it.
  • Never claims CCA, deliberately: claiming it would jeopardise the exemption. CCA also cannot be used to create a rental loss in any case.[6]
  • Treats the rented share as income property from closing, so the gain on that share is taxed when the home is sold.[4] For a home bought with the suite, this is our reading: the change of use is taken at the closing, at the price paid, so nothing is taxed then and the rented share's cost is its share of the price. The mortgage interest deducted from the rent is the suite's share of the floor area times all the interest, the way the CRA splits every whole-home cost.[7] Under the suite's details on the House page you can tick that the space was already set up for renting (no structural change) and that you claim no capital cost allowance; the whole gain then stays exempt, as the folio's practice allows (¶2.59).[2] Untick it if either is not true.
  • When the suite stops being rented, the rented share goes back to being part of your home. The law would normally treat that as selling the share at its value then and buying it back, and tax the gain. The owners can elect under subsection 45(3) that this does not happen, unless capital cost allowance was ever claimed, which All the Numbers never does. All the Numbers takes that election: nothing is taxed when the rental stops, and when the home is sold the share's gain is exempt only for the years it was lived in, plus one. The law also lets an owner with this election designate up to 4 of the earlier years; it is not settled whether that reaches a share rented while the rest of the home was designated, so All the Numbers claims none of them.[8]
  • Offsets a rental loss against your other income in the same year, which is what the CRA allows when the expenses were incurred to earn income. A loss bigger than that income becomes a non-capital loss carried forward and used against later income; see renting out a suite. The engine does not test whether the rental had a reasonable expectation of profit.
  • Flags a vacancy rate above 20% or a rent that is outside 0.2%–0.6% of price per month, so an input typo does not quietly drive the answer.
  • Splits a couple's home 50/50 between the two of you when no ownership shares are given; each owner then reports their own share of the rent and the expenses, since tax is per person.[9]

See also: selling a home, home prices over time.

See also

  • Capital cost allowance · Capital cost allowance (CCA) is the tax write-off for the building part of a rental property, at 4% of the remaining balance a year for most rental buildings. Claiming it can cost the principal-residence exemption on a rented home and creates recapture on a sale, so All the Numbers never claims it.
  • Capital gains and the adjusted cost base · Selling an investment for more than its adjusted cost base is a capital gain, and half of it is added to taxable income in the year of the sale. Growth that has not been sold is not taxed.
  • Change of use · When part of a home starts to earn rent, tax law can treat that part as sold and bought back at market value. An election can postpone this for up to four years, and the cost of the property for a later write-off is set by a formula. All the Numbers assumes the rental is minor, so none of this is applied.
  • Home prices over time · A home's value is projected by growing it at one assumed rate, 3.5% a year by default, which is PWL Capital's 1% real return on a house plus 2.5% inflation. It is an editable assumption, not a forecast, and the Simulation view shows how widely a real home's value varies around it. A home added to a plan starts at $600,000 with 20% down until you enter its own figures.
  • Income tax brackets and your marginal rate · Federal and Ontario tax are each charged in slices of income at rising rates, then reduced by credits, with an Ontario surtax and health premium on top. The marginal rate is what the next dollar costs; the average rate is total tax over income.
  • Renting out a suite · Rent from part of your home is taxable income. The costs of the whole home are deductible only for the rented share, mortgage principal and land transfer tax are not deductible, and a loss offsets other income when the rental is run to earn money. A lender may count part of the rent when you apply.
  • Selling a home · A sale turns the home's projected market value into cash after selling costs (your province's typical commission, the sales tax on it and legal fees) and the mortgage payout. The gain on a principal residence is exempt from tax, apart from the part that was rented out when the exemption does not cover it.
  • Tax on the final return · What the plan's last year would owe in tax if the household died then, and how much of the savings would be left after it.
  • Taxes are per person · Canada has no joint return, so each of you is taxed on your own income with your own brackets and credits. The routes that do move income between partners — pension splitting, spousal RRSPs, prescribed-rate loans — are not modelled, so a couple's real bill may be lower than this.

References

  1. ↑Guide T4036, Rental Income — Part 3 Income / Line 8299 Total gross rental income · Gross rental income is total rents actually earned in the year (line 8141 / 8299); no vacancy-allowance deduction exists · effective 2025-01-01
  2. ↑Income Tax Folio S1-F3-C2, Principal Residence · CRA practice: no deemed disposition and the whole property stays a principal residence when income use is ancillary, there is no structural change and no CCA is claimed; a self-contained suite is a structural change · effective 1972-01-01
  3. ↑Income Tax Folio S1-F3-C2, Principal Residence · Folio S1-F3-C2: full PRE retained only if income use is ancillary, no structural change, and no CCA claimed; claiming CCA triggers deemed disposition of the rented portion · effective 2019-03-19
  4. ↑Income Tax Folio S1-F3-C2, Principal Residence · PRE partial change-in-use: rented share taxable unless ancillary use, no structural change, no CCA (Folio S1-F3-C2 ¶2.57–2.60) · effective 2019-03-19
  5. ↑CRA Guide T4037, Capital Gains 2025 ("The inclusion rate for 2025 is 50%"; 2/3 proposal cancelled per PM release 2025-03-21) · Capital gains inclusion rate (individuals) · 50% · effective 2001-01-01
  6. ↑Guide T4036 Rental Income — Chapter 4 · CCA cannot create or increase a rental loss: the claim is capped at net rental income before CCA (Reg. 1100(11)) · effective 1972-01-01
  7. ↑Folio S1-F3-C2 ¶2.57–2.58 (a structural change for income use is a change in use of that part, ITA 45(1)(c)); for a home bought that way the planner takes the change at closing, which gives the same cost for the rented share as buying it for rent from day one. T4036 "Renting part of your property": whole-property expenses, interest included, split by area · A home bought with a suite (not attested as ancillary use) is run as a partial change of use at closing: the suite's floor share is deemed sold and bought back at the purchase price, so no gain arises then and that share's later gain is taxable on a sale. The mortgage interest deducted against the rent is the same floor share of the whole loan's interest · effective 2026-10-14
  8. ↑Our convention under ITA 45(1)(c)(i), 45(3) ("ceases in whole or in part to be used for that purpose") and 45(4) · When a taxed suite stops being rented, the owners take the 45(3) election (the planner claims no capital cost allowance, so 45(4) cannot void it): no gain is taxed when it stops, the rented share keeps its cost and years, and on a sale its gain is exempt only for the years it was lived in. None of the four years before the change is designated back · effective 2026-10-21
  9. ↑CRA T4036 Rental Income — co-ownership; our convention · A couple's home whose ownership shares are not given is owned 50/50; each co-owner reports their share of rental income and expenses, and every owner's FHSA and Home Buyers' Plan may fund the purchase; reported on the run · 50% · effective 2026-09-25
  10. Income Tax Folio S1-F3-C2, Principal Residence · Subsection 45(3) election: up to this many tax years before the change to personal use may be designated; void if CCA was claimed after 1984 (45(4)) · 4 years · effective 2019-03-19