Basement Suite Rental: T776 Expenses and Principal Residence

How do I split house costs between my part and a basement suite or rented room on the T776?

Divide each cost that covers the whole house between your part and the rented part by square metres or by the number of rooms you rent, then deduct the rented share. A current expense that exists only because of the suite is deducted in full; build and improvement costs are capital. The CRA names both methods; keep the measurements behind whichever you use (CRA Guide T4036).

If you rent a room to a lodger, you can claim all the expenses of that room. For rooms you use together, such as a kitchen or living room, you can claim a portion, using factors such as availability for use or how many people share the room (CRA Guide T4036).

On the T776, enter the full cost of each expense in Part 4 and your personal share in the personal-portion column.

Whether the whole home keeps its principal residence status is a separate test with three conditions; see "Will renting a basement suite or room cost me my principal residence exemption?" below.

What makes a case not simple:

• The suite was built or finished to rent, which is a structural change, so that part may be treated as sold.
• You claim, or plan to claim, capital cost allowance (CCA), which can undo the exemption treatment for the rented part.
• The rented part is large, or you moved between floors, so the change in use may apply.
• You expect to sell in the next few years, when the rented part may need its own calculation.
• The suite is let for stays under 90 days.
• The suite loses money, or earlier years' rent was not reported.

What to gather: a floor plan or room count; the lease and start date; rent received; property tax, insurance, mortgage and utility statements; invoices for repairs or the build; and what you paid for the home and what it was worth when renting began.

Which costs are fully rental and which are split?

Costs that exist only for the suite are fully rental, whole-house costs are split, and some costs are never deductible. The CRA allows reasonable expenses incurred to earn rent (CRA: rental expenses).

The rows draw on CRA Guide T4036. For repair versus capital, see rental repairs: current or capital; for interest on refinanced or borrowed money, interest deductibility for rentals; for books that match the T776 lines, rental statement expense lines.

If I include utilities in the rent, how do I deduct them?

You can deduct utilities such as gas, oil, electricity, water and cable when your rental arrangement says you pay for the utilities of the rented space (CRA: rental expenses). When the rent includes utilities, report the full rent as income and deduct the suite's share of the bills as an expense.

If the tenant pays a separate meter directly, you have no utility cost for that meter to deduct. If the house has one meter, split the bill with the same area or room share you use for other shared costs. The lease should show which utilities the rent covers; the deduction follows that arrangement.

Will renting a basement suite or room cost me my principal residence exemption?

Not necessarily. You report the rent and may claim the rental expenses, other than CCA, while the whole property keeps its status. The CRA treats the whole property as keeping its nature as a principal residence when three conditions are all met (CRA: principal residence; Folio S1-F3-C2, paragraph 2.59).

If one condition fails, the CRA usually considers that the use of the rented part changed. That part is treated as sold at its share of the home's fair market value (what it would sell for) and bought back at the same amount, even though you sold nothing, unless you make an election under section 45(2) of the Income Tax Act (CRA: principal residence). The part you live in can still be a principal residence.

If the rented part falls outside the CRA's ancillary-use practice, a later sale may need separate calculations for the part you lived in and the rented part, and an election can affect them; see the principal residence exemption.

What is unsettled. These conditions are CRA practice, not wording in the Act, which deems a sale on a change in use (section 45(1)). The CRA says the rental use must be small but gives no percentage. Its wording speaks of changes you make, so a suite already in place when you bought is not addressed and depends on the facts.

Why does claiming CCA matter to the exemption?

Claiming capital cost allowance on the rented part ends the CRA's ancillary-use treatment, and the deemed sale is then applied as of the time the rental use began, not only from the year you claimed (Folio S1-F3-C2, paragraph 2.60). CCA is the tax depreciation on a rental building.

The CRA's rental guide lets a landlord who rents part of a home claim CCA on the rented area only to the extent it does not create or increase a rental loss, and its example notes the building is not designated as a principal residence (CRA Guide T4036). A CCA claim carries the consequences above, so the CCA choice carries these consequences from the first claim; see should you claim CCA on a rental.

What if I added or finished the suite?

Building or finishing a self-contained suite is a structural change, so the ancillary-use practice does not cover that part. The CRA's folio names turning part of a house into a self-contained domestic establishment as an example of a substantial, more permanent change in use (Folio S1-F3-C2, paragraphs 2.57 and 2.58).

Without an election, the suite's share of the home, usually measured by area, is treated as sold at its share of fair market value on the date it changes (CRA: principal residence).

An election under subsection 45(2), made by a letter you sign and file with the return for the year of the change, stops the deemed sale. A later claim of CCA rescinds it from the first day of that year (Folio S1-F3-C2, paragraphs 2.48 and 2.60.1). The CRA applies its four-year rule to partial changes too: for up to four tax years in which the election is in force, the rented part can count as principal residence years although you do not live in it. This does not limit the part you live in. The income must still be reported and CCA should not be claimed (Folio S1-F3-C2, paragraphs 2.50, 2.51 and 2.60.1). Missed the election? See home turned rental: election and later sale.

Renovations that extend the useful life of the property are usually capital, not a current expense (CRA Guide T4036). Keep build invoices separate from repairs.

I rented the main floor and moved downstairs, or switched mid-year: what changes?

Your expenses are separate from the sale question: deduct the rented share of whole-house costs, by area or rooms, for the time it was rented or available for rent. Renting most of the home is not ancillary use. The CRA gives no percentage for "ancillary", but as the rented share grows toward most of the home the condition gets harder to meet, and a substantial change in use can bring the deemed-sale rule, unless a section 45(2) election applies (section 45(1)(c); CRA: principal residence).

Property tax is deductible for the period the space was available for rent (CRA: rental expenses). If the share changes during the year, calculate each period separately and keep the dates.

Space that goes back to your own use is a second change in use and a further deemed sale of that part (Folio S1-F3-C2, paragraph 2.57). A section 45(3) election can defer a change from income use back to a principal residence. You sign it and file it with the return for the year of the actual sale, or within 90 days after a CRA demand if earlier, and it does not apply if CCA was allowed on the property to you or your spouse or partner before the change (Income Tax Act, section 45). Whether it fits a home bought to live in is a question for a CPA.

If you moved out and rent the whole home, see turning your home into a rental. If you only changed floors, write down the date, the old and new rented share, and get a value for the home on that date, such as an appraisal or comparable sales.

Can I claim a loss on a suite, and what does the CRA expect?

A rental loss can reduce other income only when expenses are incurred to earn rent and you reasonably expect a profit. The CRA says you cannot claim the expenses of a rented part if you have no reasonable expectation of profit (CRA Guide T4036).

The CRA's guide sets three limits. A small contribution from your child or anyone else living with you for upkeep or groceries is treated as cost sharing, not rent. Renting to a person you know for less than other tenants pay cannot create a loss. Consistent losses may mean the rental is not a source of income. CCA cannot create or increase a loss (CRA Guide T4036).

Keep the lease, proof of rent received, how you set the rent, and receipts for every expense. For a suite that loses money year after year, see rental losses and CRA review.

Do I charge or pay GST/HST on a suite rented as a home?

Rent for a suite occupied as a home for one month or more at a time is an exempt supply, so you do not charge GST/HST on it (Excise Tax Act, Schedule V, Part I, section 6; CRA Memorandum 19.2.2).

A person who makes only exempt supplies generally cannot register for GST/HST and generally cannot claim input tax credits on costs of making those supplies (CRA: RC4022). Tax you pay on materials or contractors for the suite is then a cost. If the work creates a new or substantially renovated unit, a builder self-supply rule can also deem GST/HST on its fair market value even without registration, unless the home is used primarily as a residence by you or a related individual and you claimed no input tax credits (Excise Tax Act, section 191). The CRA's rental guide describes a rebate for landlords who build or substantially renovate housing for long-term rental; see GST/HST on residential property.

Stays under one month differ: they are generally taxable when a registrant supplies them, unless the rent is $20 or less per day. Registration is not required while your worldwide taxable sales, combined with those of your associates, stay at or below $30,000 in a single quarter and over the last four quarters (CRA: RC4022).

What local rules apply to legal suites and short-term renting?

Whether a suite is legal, and what permits, zoning, building and fire rules and tenancy law apply, is set by each province and municipality. This page does not cover those rules; check with your municipality before you rent.

Local rules reach your tax return for short stays. A residential property rented or offered for fewer than 90 consecutive days is a short-term rental. Where the location does not allow it, or a required registration, licence or permit is missing, the share of otherwise deductible expenses for the non-compliant days is denied: expenses × non-compliant days ÷ short-term rental days (Income Tax Act, section 67.7; CRA tax tip). The T776 reports it on line 9366. The rule covers all or any part of a house. For when short-term income is business income, see short-term rental income.

Example

All amounts are in Canadian dollars and are illustrative.

Splitting a suite by floor area

A house has 180 m² of floor area and the basement suite is 60 m², one third. Property tax, insurance, mortgage interest and utilities for the house total C$19,800, so the rental share is C$6,600. Repairs inside the suite cost C$1,400 and are fully rental. On the T776, total expenses are C$21,200, the personal portion is C$13,200 and deductible expenses are C$8,000. With C$24,000 of rent, net rental income before CCA is C$16,000. The owner claims no CCA. The split is the same whether or not the CRA's ancillary-use practice applies; that is a separate test.

Two bedrooms rented to students

A house has eight rooms and the owner rents two bedrooms on a lease that includes utilities. The rented share by rooms is one quarter. Shared costs of C$24,000, utilities included, give a rental share of C$6,000. The owner made no structural change and claims no CCA, so the CRA's ancillary-use conditions can be met if the rental use stays small next to living there, in which case the whole home keeps its status under CRA practice. Whether one quarter counts as small is the open point, because the CRA gives no percentage. The rent and the C$6,000 still go on the T776.

Basement finished into a self-contained suite

A home bought for C$600,000 is worth C$900,000 when the owner spends C$60,000 finishing a 60 m² basement, one third of 180 m², into a self-contained suite and starts renting it. Under the CRA's folio, a self-contained suite is a substantial change in use, so one third of the home is generally treated as sold for C$300,000 and bought back for the same amount, unless a section 45(2) election is filed with that year's return. Only the gain over that part's cost is counted, not the C$300,000, and a designation or the election can shelter it; the election does not make the suite exempt for an unlimited time. The C$60,000 is a capital cost, not a repair. Claiming CCA later would rescind the election from the first day of that year. Each of these steps turns on dates and values.

Different for you?

• You built or finished the suite to rent, moved between floors, or plan to sell soon: the expense split, whether to claim CCA at all, how the change in use is reported and how a later sale is treated all turn on dates and values. Gather the floor plan, build invoices, the home's value when renting began and your purchase records, and get individual tax help.
• You have no record of the suite's rent and costs, or the records mix house and suite: the split needs the lease, rent received and bills by month. See rental statement expense lines for how to set the records up, and get individual tax help if earlier years have to be rebuilt.
• You rented in earlier years and did not report the rent: see unreported income and voluntary disclosure and get individual tax help.
• You rent the whole home, or moved out: see turning your home into a rental.
• You are selling the home: see the principal residence exemption.
• You are weighing CCA: see should you claim CCA on a rental.
• Your suite loses money: see rental losses and CRA review.
• You rent by the night or week: see short-term rental income.
• You share the rent with a spouse or co-owner: see co-owned rental property reporting.
• A parent, child or relative lives in the suite: small payments toward upkeep are cost sharing, not rent, and a loss cannot be claimed; see rental losses and CRA review and rental income.
• You live in Quebec: residents may have to file a separate provincial return, and this page covers the federal rules only (CRA: Quebec income tax package).