Renting Out Part of Your Home – A Complete Guide by a Montreal CPA Firm Near You

Introduction

More Canadians than ever are renting out part of their home—a basement suite, spare bedroom, garage loft, or even a floor of their principal residence. Whether the rental is long-term or through platforms such as Airbnb or VRBO, CRA requires you to report the income and allocate expenses properly. Renting part of your home can reduce housing costs, but it also introduces complex tax consequences, such as partial loss of the principal residence exemption (PRE), mixed-use property rules, GST/HST implications for short-term rentals, and the need to track personal vs rental portions accurately. This guide explains exactly how to report rental income from part of your home and how to avoid costly tax mistakes.

Legal and Regulatory Framework

Renting part of your principal residence is governed by the Income Tax Act, Form T776 (Statement of Real Estate Rentals), and principal residence rules under section 40(2)(b) and section 54. Rental income must be reported even if it barely covers your expenses. Expenses must be allocated between personal and rental portions based on space, time, or both. If you make structural changes that convert part of your home into a self-contained rental unit—or if you claim CCA (Capital Cost Allowance)—you may permanently lose the PRE on that portion. Short-term rentals under 30 days may trigger GST/HST registration once revenues exceed $30,000 in a 12-month period.

Key Court Decisions

In Chang v. Canada, the taxpayer lost a portion of the PRE because the rented suite was self-contained and structurally separate. In Bruneau v. Québec, renting part of a home through short-term platforms caused allocation issues and reduced the PRE. In Gray v. The Queen, CRA successfully denied certain expenses because allocation between personal and rental portions was not supported by documentation. In Youngman v. Canada, mixed-use property required allocation of expenses based on actual use. These cases reinforce the importance of accurate allocation and documentation.

Why Renting Part of Your Home Creates CRA Scrutiny

CRA routinely audits homeowners who rent part of their principal residence because many claim full expenses instead of allocating, forget to report rental income, or improperly claim the PRE at sale. CRA compares tax returns to municipal permits, hydro usage, Airbnb/VRBO platform data, mortgage information, and land registry records. Red flags include: large rental losses, inconsistent allocation, claiming CCA on a principal residence, unreported short-term rental income, or major renovations that create a separate unit.

How to Report Rental Income on Part of Your Home

Rental income is reported on Form T776. You must report gross rent and allocate expenses using reasonable methods, such as: square footage of the rented area divided by total square footage; number of rooms rented vs total rooms; or number of days rented vs days available for personal use. Allocation must be consistent and supported by documentation. You cannot deduct expenses that relate solely to personal living space.

Deductible Expenses for Partial Home Rentals

1. Mortgage Interest

Only the portion attributable to the rental area is deductible. Principal is never deductible.

2. Property Taxes and Home Insurance

Allocate based on the rental portion.

3. Utilities

Deduct the appropriate share of electricity, heating, water, and internet.

4. Repairs and Maintenance

Repairs that relate solely to the rental portion are fully deductible; shared repairs must be allocated.

5. Depreciation (CCA)

CCA is optional, but claiming it may permanently eliminate the PRE on the rented portion. Extreme caution is required.

6. Condo Fees

Deduct the portion that relates to the rental area.

When Renting Out Part of Your Home Affects the Principal Residence Exemption

You may lose part of the PRE if:

• you create a self-contained suite with its own entrance, bathroom, and kitchen

• you claim CCA on any portion of the home

• the change in use is substantial or structural

• the rented area is no longer integrated into your personal living space
  However, CRA allows the PRE to remain intact in many cases if: the rental use is minor, no structural change occurs, and you do not claim CCA. These conditions allow the rented area to be considered part of your principal residence.

Short-Term Rentals (Airbnb/VRBO) and GST/HST

Short-term rentals under 30 days with services similar to hotels may trigger GST/HST registration once annual revenues exceed $30,000. This rule applies even if the space is inside your home. Long-term rentals (over 30 days) are exempt from GST/HST.

Mackisen Strategy

At Mackisen CPA Montreal, we help homeowners rent out part of their homes without triggering unnecessary CRA exposure. We determine appropriate allocation methods, prepare Form T776, analyze whether claiming CCA is advisable, assess PRE risks, manage GST/HST obligations for short-term rentals, reconstruct missing records, and defend homeowners during CRA or Revenu Québec audits. Our strategies maximize deductions while preserving tax benefits on eventual sale.

Real Client Experience

A Montreal homeowner renting their basement suite was audited due to inconsistent allocation; we recalculated expenses and preserved most deductions. A client who accidentally claimed CCA avoided loss of PRE after we filed corrective adjustments. An Airbnb host renting a spare room avoided GST/QST penalties when we proved annual revenue remained below $30,000. A duplex owner preserved the entire PRE after we demonstrated that the rented floor was not a fully self-contained unit and remained integrated with the home.

Common Questions

Do I lose my principal residence exemption automatically? No—only if structural changes or CCA are claimed. Do I have to report rental income if it only covers expenses? Yes—CRA requires full reporting. Can I deduct renovations? Only if they relate to the rental portion. Does Airbnb change my tax situation? Yes—short-term rentals often require GST/HST registration.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps homeowners rent out space safely and profitably while staying compliant. Whether you rent long-term, short-term, or occasionally, we ensure accurate reporting, optimal deductions, and full audit protection.