How to report basement suite income, claim deductions, and protect your principal residence exemption.
Renting out a basement suite is one of the most common ways Canadians generate rental income while living in their own home. Whether you have a legal suite or a finished basement you rent informally, the income must be reported to the CRA — and there are both tax advantages and potential risks to understand before you start collecting rent.
Yes — all rental income, including from a basement suite in your primary residence, must be reported on your T1 personal tax return using Schedule T776 (Statement of Real Estate Rentals). The CRA expects this income to be reported even if the arrangement is informal or month-to-month.
When you rent part of your home, you can deduct a proportionate share of household expenses. The most common method is by floor area percentage:
Expenses that are 100% for the rental unit (repairs inside the suite, suite-specific advertising) are fully deductible. Expenses that are shared (roof, furnace, exterior maintenance) are split by the rental percentage.
| Expense | Deductible Portion |
|---|---|
| Mortgage interest | Rental % (e.g. 35%) |
| Property taxes | Rental % (e.g. 35%) |
| Home insurance | Rental % (e.g. 35%) |
| Utilities (heat, hydro, water) | Rental % or actual if separately metered |
| Suite repairs and maintenance | 100% |
| Advertising for tenants | 100% |
| Shared repairs (roof, furnace) | Rental % |
| Internet/cable (if included in rent) | 100% |
This is the most important tax consideration for basement suite landlords. Renting part of your home can affect your principal residence exemption (PRE) when you sell — but the CRA provides a way to protect it:
If you rent the basement suite without making significant structural changes (i.e., it's still fundamentally part of your home), and you do not claim CCA on the rental portion, the CRA generally allows you to elect to preserve the full PRE on the entire property. This is an important election that many basement suite owners overlook.
Claiming CCA on the rental portion triggers a "change in use" and can permanently remove that portion from PRE eligibility. This means a percentage of your eventual capital gain on sale becomes taxable — even if you stop renting the suite before selling.
Many Canadian cities require basement suites to meet specific building code and zoning requirements to be "legal." A legal suite typically requires:
Renting an illegal suite creates liability risk — insurance claims may be denied, and you may face municipal fines. That said, tax reporting is still required regardless of suite legality.
Long-term residential rentals (month-to-month or fixed-term leases) are exempt from GST/HST. You do not charge GST/HST on rent, and you cannot claim input tax credits on the rental portion of your home expenses. Short-term rentals (under 30 days) are taxable supplies — if you exceed $30,000 in short-term rental revenue, you must register for GST/HST.
Building a legal basement suite typically costs $50,000–$120,000 depending on the city and scope. However:
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Get KOHO Free — Use Code 45ET55JSYAA basement suite is a practical way to generate rental income from your existing home. Report all rental income on T776, prorate shared expenses by floor area, and — critically — do not claim CCA if you want to preserve your full principal residence exemption on sale. Keep clean records and consider consulting a tax professional when you first start renting to set up your reporting correctly from the start.