Renting Out Part of Your Home — Tax Implications

Introduction
Understanding renting out part of your home tax implications is essential for homeowners, condo owners, and real estate investors across Canada—especially in Québec, where Revenu Québec enforces strict rental and principal residence rules. Whether you rent out a basement, a room, a suite, a garage apartment, or operate a partial-home Airbnb, the moment you begin earning rental income, your property becomes a mixed-use asset. This changes how you calculate expenses, how you track square footage, and even how much tax you may owe when you eventually sell the home. This guide explains everything you need to know about renting out part of your home tax implications to avoid costly mistakes and protect your principal residence exemption.

Legal and Regulatory Framework
Renting out part of your home tax implications are governed by:

• the Income Tax Act
• the Excise Tax Act (GST/HST)
• Québec’s Taxation Act
• CRA Form T776
• Québec Form TP-80
• principal residence exemption (PRE) legislation
• capital cost allowance (CCA) rules
• GST/QST rules for commercial activity
• CRA and ARQ mixed-use property audit guidelines

The tax treatment depends on:

• the percentage of home rented
• the type of rental (long-term vs short-term Airbnb)
• whether structural changes were made
• whether CCA was claimed
• the intention behind renting
• how the property is used over time

1. Reporting Rental Income When Renting Part of Your Home

You must report 100% of the rental income you earn while renting out part of your home, including:

• rent collected
• parking fees
• laundry income
• utility reimbursements
• cleaning fees (Airbnb)
• online platform payouts

Income must be reported even if:

• rent is paid in cash
• the renter is a family member
• the rental is occasional
• the amount seems small

CRA receives data from banks, e-transfer histories, Airbnb, and municipalities.

2. Deductible Expenses — Allocation Rules

When renting out part of your home, you can only deduct the rental portion of expenses.

There are two allocation methods:

A. Square Footage Allocation

Most common method.

Example:
• Home = 2,000 sq ft
• Basement apartment = 600 sq ft
Deduction percentage = 600 ÷ 2,000 = 30%

B. Room-Count Allocation

Used for room rentals without dedicated space.

Example:
• Home has 8 rooms
• You rent 1 room
Deduction percentage = 1 ÷ 8 = 12.5%

Deductible expenses include:

• mortgage interest
• property taxes
• home insurance
• utilities
• repairs and maintenance
• internet (business portion)
• cleaning supplies
• Snow removal & landscaping
• portion of condo fees
• Airbnb platform fees
• depreciation (CCA) — with caution

Expenses must be reasonable and tied to the rental space.

3. Repairs vs Capital Improvements

Repairs (deductible immediately)

• painting
• fixing a leak
• patching walls
• replacing small fixtures

Capital improvements (CCA-eligible only)

• new kitchen or bathroom in the rental portion
• new roof
• major structural upgrades
• installing a separate entrance

Capital items must be depreciated—not deducted fully.

4. The CCA Trap — Risk to the Principal Residence Exemption

One of the biggest renting out part of your home tax implications is related to CCA (Capital Cost Allowance).

If you claim CCA on the rental portion:

• you may lose the principal residence exemption (PRE) on that portion of the home
• future capital gains become partially taxable
• CRA considers the rental portion a commercial use asset

In most mixed-use cases:

DO NOT claim CCA

unless the rental portion is fully separate (duplex, triplex).

This is one of the most common and dangerous mistakes homeowners make.

5. Principal Residence Exemption (PRE) for Mixed-Use Homes

If you rent out part of your home:

You can still claim 100% PRE IF:

• the rental portion was not structurally separated (no separate entrance, no separate unit)
• no CCA was claimed
• the rental use was ancillary (small portion, incidental)
• the home continued to be used primarily as your residence

BUT you may lose part of the PRE if:

• the rental unit is self-contained
• you claim CCA
• you conduct substantial renovations
• the home is used partly as a business
• more than 50% is rented

This is a major area of CRA and ARQ audit scrutiny.

6. GST/HST and QST Implications

Long-term rentals (30+ days) of residential space are exempt from GST/HST and QST.

BUT…

Short-term rentals (Airbnb):

• are taxable supplies
• may require GST/HST registration after $30,000
• in Québec, QST registration is mandatory even under $30,000
• cleaning and service fees may trigger sales tax
• hosts may claim ITCs/ITRs on expenses

Understanding GST/HST/QST is crucial in renting out part of your home tax implications.

7. Audit Triggers for Home Rentals

CRA and ARQ frequently audit mixed-use homes when:

• rental expenses are unusually high
• Airbnb income is not reported
• CCA is claimed incorrectly
• personal vs rental use allocation seems unreasonable
• utilities or repairs deducted at 100%
• home sold shortly after renting
• PRE claimed on a self-contained rental unit
• missing receipts or invoices

Mixed-use real estate is one of the largest CRA audit categories.

8. Documentation Requirements

Keep:

• lease agreements
• Airbnb payout statements
• floor plans for allocation
• renovation receipts
• mortgage statements
• utility bills
• home-use logs
• TP-80 and T776 records
• GST/QST filings (if applicable)
• proof of rental occupancy

Keep all records for six years, but longer if the home is later sold.

Key Court Decisions

Canadian courts have ruled:

• claiming CCA can permanently deny PRE
• mixed-use properties must follow “reasonable allocation” standards
• Airbnb activity is business income
• undocumented expenses are denied
• personal-use areas cannot be deducted
• proof of occupancy is required for PRE eligibility

Québec courts often uphold even stricter interpretations.

Mackisen Strategy

Mackisen CPA provides full expert support for renting out part of your home tax implications:

• optimal allocation between personal and rental areas
• calculation of deductible expenses
• protecting the principal residence exemption
• avoiding the CCA trap
• structuring Airbnb rental correctly
• preparing T776 and TP-80
• registering and filing GST/QST for short-term rentals
• reconstructing missing receipts
• defending mixed-use homes during CRA or ARQ audits
• planning tax impact for future property sale

We help you profit from renting without losing tax benefits.

Real Client Experience

Recent Mackisen cases:

• A homeowner rented a basement suite and claimed CCA. CRA denied PRE. We restructured filings and minimized capital gains tax.
• A Montréal Airbnb host failed to charge QST. ARQ reassessed. We registered and negotiated reductions.
• A duplex owner misallocated expenses. CRA disputed deductions. Mackisen recalculated square footage and won the objection.
• A homeowner converted part of a house into a business space. We prevented PRE loss by avoiding CCA and documenting use.
• A cottage owner rented seasonally and misreported income. Mackisen corrected filings and avoided penalties.

Common Questions

• Do I need to report rental income if it’s a family member?
Yes—always.

• Can I still get the full principal residence exemption?
Yes—if no CCA claimed and the space isn’t self-contained.

• Should I claim CCA?
Usually no—for mixed-use homes.

• Is Airbnb considered rental income?
Yes—and often business income.

• Do I need GST/HST registration?
For Airbnb: yes after $30,000.
For Québec QST: mandatory for short-term rentals.

• Can I deduct mortgage interest?
Only the rental-use portion.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps homeowners navigate the complex rules around renting out part of your home tax implications. Whether you’re renting a room, suite, basement apartment, or running an Airbnb, our expert team ensures accurate reporting, protects your principal residence exemption, and defends you during CRA or ARQ audits.