Tax Implications of Renting a Basement Suite in Canada

With the growing demand for housing and rising real estate costs, many Canadian homeowners are turning to renting out basement suites as a way to supplement their income. However, renting out a portion of your primary residence comes with tax implications that homeowners need to understand, particularly as tax regulations evolve. For 2025, there are some important considerations that could affect the way rental income from a basement suite is taxed.

1. Declaring Rental Income

The most basic and crucial tax implication of renting a basement suite is that the rental income must be declared to the Canada Revenue Agency (CRA). Under Canadian tax laws, all rental income earned must be reported as part of your overall income for the year.

What is included as rental income? Rental income includes the total amount received from tenants for the use of the basement suite. This can include not only the rent but also any amounts received for services such as utilities, parking, or cleaning if these are part of the rental agreement.

2. Deductions for Expenses

As a landlord, you are allowed to deduct certain expenses related to maintaining the basement suite from the rental income, which can reduce your tax liability. The eligible expenses can include:

• Mortgage interest: You can claim the interest on the portion of your mortgage attributable to the rental space.

• Utilities: If the tenant pays a portion of utilities, only the portion related to the rented space can be claimed.

• Property taxes: Similar to mortgage interest, you can deduct the portion of your property taxes allocated to the rental space.

• Maintenance and repairs: Any repairs or maintenance done specifically for the rental suite can be deducted. However, capital expenditures (like major renovations) need to be depreciated over time rather than deducted in full in the year they are incurred.

  
  

In 2025, the CRA maintains its approach of allowing reasonable apportioning of shared expenses. For example, if your basement suite occupies 25% of your home’s square footage, you can generally claim 25% of these shared expenses. However, if some expenses are solely for the rental area (e.g., a separate heating system or water heater), 100% of that cost can be deducted.

3. Capital Cost Allowance (CCA)

Homeowners can claim depreciation on certain aspects of their rental property through the Capital Cost Allowance (CCA). While this reduces your taxable rental income, it comes with a significant caveat: recapture.

If you claim CCA on your rental property, when you sell your home, you may be required to pay taxes on the CCA you’ve claimed over the years. This could significantly increase the tax you owe at the time of sale. Most tax professionals recommend avoiding CCA claims unless you’re operating a rental property strictly for investment purposes, as opposed to renting a portion of your primary residence.

4. Principal Residence Exemption (PRE)

The Principal Residence Exemption (PRE) is a key consideration for homeowners renting out a portion of their home. The PRE allows homeowners to get an exemption on the capital gains tax on the sale of their principal residence. However, if you rent out a significant portion of your home, such as a basement suite, you might lose part or all of this exemption.

Under the tax regulations, you can still maintain the full principal residence exemption as long as:

• The rental portion is not a separate unit (i.e., it does not have a separate entrance, kitchen, or bathroom).

• The rental use is not considered a commercial rental activity (i.e., the rental income is incidental and does not generate significant income compared to the value of the property).

However, if the basement suite is a fully self-contained unit, you may lose part of your principal residence exemption, and capital gains tax could apply on the portion of the home used for rental purposes when you sell the property.

5. GST/HST Considerations

Rental income from long-term rentals (i.e., residential units) is GST/HST exempt in Canada, which means you don’t have to charge GST/HST on rent payments. However, if you provide short-term rentals (e.g., renting your basement suite on platforms like Airbnb), you may be required to charge and remit GST/HST depending on the nature of the rental and how often it’s rented.

Under the regulations, if your total taxable revenue from short-term rentals exceeds $30,000 in a 12-month period, you are required to register for GST/HST and begin collecting and remitting it to the CRA.

6. Short-Term Rentals vs. Long-Term Rentals

There’s an important distinction between long-term rentals (leases typically lasting six months or more) and short-term rentals (like those offered on platforms such as Airbnb or VRBO). The tax treatment varies significantly between the two:

• Long-term rentals: As mentioned, these are typically exempt from GST/HST, and the rental income is treated like any other form of passive rental income.

• Short-term rentals: If you exceed the $30,000 threshold, GST/HST must be collected. Furthermore, short-term rentals might also be subject to additional local regulations, including licensing fees and municipal taxes.

7. Municipal Regulations and Taxes

Aside from federal tax implications, homeowners should be aware of municipal regulations, particularly if they are offering short-term rentals. In many cities across Canada, regulations around renting basement suites have tightened due to housing shortages and concerns about safety. Homeowners may need to:

• Obtain a rental license.

• Ensure the suite meets building code and safety standards.

• Pay local taxes, such as vacancy taxes or short-term rental levies.

  
  

In cities like Vancouver and Toronto, new bylaws require registration and regular inspections of rental suites, with potential fines for non-compliance.

8. Provincial Taxes

In provinces like British Columbia and Ontario, you may also be subject to provincial taxes or levies for renting a basement suite. These vary by region, and homeowners should check their local provincial regulations.

Conclusion

Renting out a basement suite can be a lucrative way to offset housing costs, but it’s essential to understand the tax implications involved. Homeowners must navigate federal income tax rules, potential GST/HST obligations, municipal regulations, and the impact on their principal residence exemption. By keeping proper records and understanding the deductions and liabilities, you can ensure that you stay compliant with CRA regulations while maximizing your financial benefit from renting out part of your home.

As always, it's a good idea to consult with a tax professional or accountant to ensure that you're following the most current tax rules and taking advantage of all available deductions.

Considering renting your basement suite? Anker RETax can help you navigate tax rules and deductions to maximise your benefits. Contact us today!

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