Zoocasa
Real Estate Sold Prices
Calculator
Map
Property Trends & Insights
  • Blog Home
  • For Buyers
  • For Sellers
  • Real Estate News
  • Mortgage News in Canada
  • Free Guides (PDF)
  • Real Estate Infographics
  • Real Estate News
Zoocasa
Home First Time Home Buyer

How to Handle Taxes When Renting Out Your Basement Income Suite

Gordon Powers by Gordon Powers
June 21, 2017
in First Time Home Buyer, Home Investment
3 min read
Renting Out Your Basement Income Suite
Share8
Tweet
Share12
20 Shares

If you believe Scott McGillivray, real-estate entrepreneur and host of the long-running HGTV Income Property show, secondary income suites are a great way to get started in the real estate investment business.

Since a tenant is paying down part of your mortgage, incorporating an income-producing element makes your house more affordable, may allow you to live in a house/area that you couldn’t otherwise afford, and can often add a lot of value to your property, he maintains.

While that can mean something as simple as renting a room in your house to a foreign exchange student, more and more Toronto condo and house owners are creating income suites to capitalize on tight rental market and create some passive income. Perhaps you’re thinking of joining them?

Bylaws on Basement Flats Can Vary

Of course, you’ll first have to fund a significant renovation – which may also require a zoning change and dealing with your city’s bylaws and regulations. Although bylaws across Ontario are generally similar, each municipality has its own variations so don’t take anything for granted.

You’ll also have to let your insurance company know that you’ll be renting out your basement as this will increase your insurance risk. By not disclosing this information, the insurance company could refuse to pay a claim if, say, there was a fire.

Tax Rules on Income Suites Often Unclear

What’s more, despite the fact that you are definitely allowed to write off some of the expenses you’d be paying for anyway, you can easily run into tax trouble with the Canada Revenue Agency if you’re not careful. The first thing to remember is that all your net rental income is taxable – at the same rate that you pay on ordinary income.

The total rental income from your suite is usually reported on a calendar-year basis, using Form T776 when you file your tax return – but it’s the net number that really matters. To offset the rent you collect, you can deduct the costs of advertising for tenants, as well as a portion of your mortgage interest, property taxes, insurance, utilities, repairs and maintenance. You can’t, however, write off the cost of your own labour to look after things.

Principal Residence Exemption at Risk

But that’s not where the big tax liability lurks. If you rent out too much of your home or tear it apart to accommodate more tenants, for instance, you could jeopardize your ability to claim the capital gains tax exemption on a principal residence. This could be an important factor if you hope to sell your home on a tax-free basis in the future.

Here’s the good news: As long as you meet the following tests you’ll be able to continue designating the entire property as your principal residence. First, the rental portion has to be “ancillary” in relation to the overall use of the property. In other words, the tenant’s space has to be a lot less than yours. In addition, you can’t have made any significant structural changes to the property or deducted any capital cost allowance – in other words, depreciation for tax purposes – on the portion of your home that you’re renting out.

When reviewing structural changes, CRA will be primarily interested in more permanent modifications, such as installing a separate entry for tenants, adding a second kitchen or moving walls around. That means creating an elaborate self-contained income suite like McGillivray often does will generally result in capital gains tax upon sale.

CRA Increasingly on the Lookout

If you are considered to have changed the use of your home from a personal-use property to an income-producing one, you’ll be deemed to have sold, and subsequently repurchased it, at fair market value at the time of the change in use. You’ll be expected to report this transaction and, if the property has gone up in value, there could be some tax to pay as a result since the principal residence exemption is no longer available to you.

In the past, much of this activity went unnoticed since there was no easy way of tracking just who was doing what to their home. However, now that you’re required to report the sale of a principal residence on your tax return to be eligible for the capital gains exemption, it will be much easier for the CRA to check up on all this, matching reported rental income to your home’s status upon sale.

The bottom line: Before you start ripping up the basement, have a talk with a tax pro to ensure you’re clear on where you stand.

Previous Post

Knockout Listing Alert: 118 Arundel Avenue

Next Post

Knockout Listing Alert: 25840 Maple Beach Road

Gordon Powers

Gordon Powers

Related Posts

Affordability

Rent or Buy? Average Monthly Rental Prices vs. Monthly Mortgage Payments in the GTA

August 10, 2022
Ask the Pros

Should You Purchase a Home With an Open Floor Plan?

August 8, 2022
Affordability

4 Great Locations Outside of Toronto for First Time Home Buyers

July 8, 2022

Blog Search

No Result
View All Result

Recent Articles

Sharp Housing Adjustment as Sales Continue to Drop: CREA

August 15, 2022

Hidden Gems for Sale in Markham under $700,000

August 12, 2022

Rent or Buy? Average Monthly Rental Prices vs. Monthly Mortgage Payments in the GTA

August 10, 2022

Should You Purchase a Home With an Open Floor Plan?

August 8, 2022

Sharp Housing Adjustment as Sales Continue to Drop: CREA

August 15, 2022

Hidden Gems for Sale in Markham under $700,000

August 12, 2022

Rent or Buy? Average Monthly Rental Prices vs. Monthly Mortgage Payments in the GTA

August 10, 2022

Should You Purchase a Home With an Open Floor Plan?

August 8, 2022

Condo Apartments Remain the Most Affordable and Second Most In-Demand Property Type in Toronto and GTA: TRREB

August 4, 2022

Your Home’s Screen Appeal: How to Stage Your Home for Photos and Videos

August 3, 2022

Newsletter Sign-up

Join a community of 130,000+ subscribers. Don't miss important real estate news, market data, and buying and selling tips.

Social Media

Featured Listings (Updated Weekly)

Hidden Gems for Sale in Markham under $700,000

August 12, 2022

The Most Expensive and Affordable Homes Sold in July in the GTA

July 29, 2022

The Most Viewed Homes in June 2022

July 22, 2022

Condos for Sale with Amenities in the GTA

July 11, 2022
first-time home buyer programs and rebates

About Zoocasa

Zoocasa.com is a full-service brokerage that offers advanced online search tools to empower Canadians with the data and expertise they need to make more successful real estate decisions.

Newsletter Sign-up

Join 130,000+ weekly subscribers. Don’t miss important real estate news, market data, and buying and selling tips: sign-up here.

Social Media

Zoocasa Tools

MLS Listings Canada
Search Sold Listings
iOS App
Android App
Find an Agent
Contact Us

  • Homes & Real Estate Properties
  • Terms of Use
  • Privacy Policy
  • Contact Us

© 2015 - 2022 Zoocasa Realty Inc., Brokerage

  • Blog Home
  • For Buyers
  • For Sellers
  • Real Estate News
  • Mortgage News in Canada
  • Free Guides (PDF)
  • Real Estate Infographics
  • Real Estate News
No Result
View All Result

© 2015 - 2022 Zoocasa Realty Inc., Brokerage