Do You Have a Rental Unit in Your Home? Prepare to Meet the Tax Man

When you rent the whole house

If you convert your entire principal residence (the home you currently live in) into a long-term rental unit, that will cause the CRA to declare there’s been a “change of use” of the property, unless you ask for an exception.

“This does mean that you are considered to have sold the property at its fair-market value and to have immediately acquired the property for the same amount,” Gibb says. The CRA calls this a “deemed disposition.”

As long as the home was your principal residence, there’s no tax created by the “sale.” You just have to report the deemed disposition on your personal tax return (using form T2091) to make sure you get what’s called the “principal residence election.”

The CRA also lets you file what’s called a “special election” to avoid the deemed disposition rule if you rent your house out for up to four years, but plan to move back in.

Gibb notes people use this election when they do things like move back in with their parents for a few years to care for them, or if an employer temporarily transfers them to a different city.

“You could rent out your home and make the election so the home remains your principal residence and remains entirely tax free,” she says.

Provided you make the required special election and move back into your house within the four-year window, there’s nothing to do or report — the home remains your principal residence. But, she says, you can’t claim any amortization or depreciation of the home against the rental income you earn.

“You [also] cannot designate any other property as your principal residence for those years,” Gibb says, adding it’s a good idea to read the fine print on your mortgage to be sure that renting the house doesn’t breach the lending terms.

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Renting a room or two

Let’s say that instead of converting the entire house to a rental, you’ve decided to create a rental unit in just part of your home — perhaps 20% of the building’s footprint.

Maybe some friends told you how their Airbnb unit is producing a tidy cash flow or you want steady income from a long-term rental to help meet rising utility and tax bills.

Converting 20% of your principal residence into a rental property, whether for short- or long-term renters, may trigger the change-of-use rules.

But, the CRA will not consider that you’ve changed your property’s use if your rental meets three conditions (the same rules apply if you use part of your home as a business):

• Your rental or business use of the property is relatively small compared with its use as your principal residence. “It has to be a very small portion of your personal residence,” says Gibb. “They don’t define that, of course, because that would be too helpful. So that’s the tricky part.”
• You don’t make any structural changes to the property to make it more suitable for rental or business purposes. “You can’t put on an addition, go out and rent it and then say there was no disposition,” she says.
• You do not deduct any capital cost allowance (also known as depreciation) on the part you are using for rental or business purposes.

“If you meet those three conditions, the entire property may qualify as your principal residence, even though you are using part of it for rental,” says Gibb. “If you do not meet these three conditions, then there is a deemed disposition of that portion of the property.”

And, if you sell the house, you’ll be required to allocate the selling price between your principal residence (where you live) and the rental property. This can be done based on square metres or number of rooms, provided the split is reasonable, she says.

Two last considerations

Gibb stresses that people who rent out their homes, or apartments in them, must report that rental income on their tax returns. Not doing that is tax evasion, which is a criminal offense.

She also has advice for those who’ve heard stories about big payouts to people who list their large homes on short-term rental websites. Such rentals are popular with people who throw lavish parties.

“Renters don’t care about your property,” she says. “They won’t take care of it.”