13 – RENTING OUT A PORTION OF YOUR HOME OR VACATION PROPERTY

🏡 Renting Out a Portion of Your Home — How to Report Income and Deduct Expenses
Preparing the T776 When Renting Out a Portion of Your Home or Vacation Property
Selling Your Home When You’ve Been Renting Out a Portion
Renting Out a Vacation or Other Personal Property
How to Prepare the T776 When a Vacation or Cottage Property is Rented Out

🏡 Renting Out a Portion of Your Home — How to Report Income and Deduct Expenses

Many Canadians earn extra income by renting out part of their home, such as a basement apartment, spare room, or even part of a vacation property. If you do this, you must report the rental income to the Canada Revenue Agency (CRA) and may be eligible to deduct certain home-related expenses.

This situation is very common, especially with rising housing costs. The good news is that CRA provides clear guidelines on how to report this income and claim deductions fairly.

💰 Reporting the Income

All rental income — even if it’s just for a single room or a basement suite — must be reported using the T776: Statement of Real Estate Rentals.
You should not list this income as “Other income” on your tax return.

The T776 allows you to:

Report total rent received.
Deduct the eligible portion of your home expenses.
Determine your net rental income or loss, which then transfers to your personal income tax return (T1).

📏 How to Calculate the Deductible Portion of Expenses

When you rent out only part of your home, you can only deduct the portion of your expenses that relates to the rented space.

There are two main ways to calculate this:

1. By Square Footage

This is the most accurate and commonly used method.
Use the formula:

Rental Portion % = (Rented Area ÷ Total Area of the Home) × 100

Example:
If your basement apartment is 500 sq. ft. and your home’s total area is 2,000 sq. ft.,
then you can deduct 25% of your shared home expenses (500 ÷ 2,000 × 100 = 25%).

2. By Number of Rooms

If you’re renting out a room (or several rooms) rather than a defined area like a basement,
use this method:

Rental Portion % = (Number of Rooms Rented ÷ Total Number of Rooms) × 100

Example:
If your house has 8 rooms and you rent out 2,
you can deduct 25% of shared expenses (2 ÷ 8 × 100 = 25%).

🧾 Common Shared Expenses You Can Deduct (Pro-Rated)

These are expenses that benefit both you and your tenant, and should be prorated based on the rental portion:

Mortgage interest (not principal)
Property taxes
Utilities (electricity, water, heat)
Home insurance
Repairs and maintenance that affect the whole house

If, for example, 25% of your home is rented out, you can deduct 25% of each of these expenses.

🧰 Direct Expenses — 100% Deductible

If an expense applies only to the rented area, you can deduct the entire cost.

Examples:

Repairs made only in the basement apartment
Painting or flooring for the tenant’s bedroom
A separate internet line or utility meter for the rental unit

⚖️ Key Tip — Accuracy Matters

When claiming rental expenses, make sure your calculations are reasonable and well-documented. CRA may review claims that seem unusually high compared to your rental income.

Keep:

Proof of expenses (invoices, receipts, utility bills)
Calculations showing how you determined the rental portion (e.g., floor plan, square footage)

This not only helps you stay compliant but also makes tax preparation easier year after year.

🧮 The Bottom Line

Renting out part of your home can be a great source of extra income — and you’re entitled to deduct fair expenses related to earning that income.

Just remember:

Report the income on Form T776.
Deduct only the portion of home expenses related to the rented space.
Keep detailed records to support your calculations.

Doing so ensures you maximize your deductions while staying on the right side of CRA rules.

Preparing the T776 When Renting Out a Portion of Your Home or Vacation Property

When you rent out part of your home—such as a basement apartment or a single room—you are earning rental income. This income must be reported to the Canada Revenue Agency (CRA) using Form T776, called the Statement of Real Estate Rentals.

If you also live in the same property, you can only deduct the portion of your home expenses that relate to the rented space. The rest of the expenses are considered personal and cannot be claimed. This section explains, step-by-step, how to complete the T776 in such situations.

1. Understanding the Scenario

Let’s use an example to make this clear.
Robert Smith rents out his basement apartment for $950 per month.

Total annual rent = $950 × 12 = $11,400

This $11,400 is the gross rental income that Robert must report on Form T776.

2. Listing the Expenses

Robert provides all his home expense information for the year, such as:

Mortgage interest: $12,000
Utilities (electricity, gas, water): $3,200
Property taxes: $3,674
Advertising: $114
Repairs and maintenance: $2,148

These are all common expenses that homeowners pay, but Robert can only deduct the portion that applies to his rental area.

3. Determining the Rental Portion

The most common ways to calculate the rental-use portion are:

By square footage – divide the area of the rented space by the total area of the home.
Example: if the basement apartment represents 25% of the total space, then the rental-use portion is 25%. Business use % = (Rental area ÷ Total area) × 100
= (25 ÷ 100) × 100 = 25%
By number of rooms – useful when renting one or two rooms in your house rather than a separate unit.
Example: 1 rented room out of 4 total rooms → 1 ÷ 4 = 25%

Robert determined that his basement represents 25% of the total home area.

4. Calculating Deductible Expenses

Shared expenses, such as mortgage interest, property tax, and utilities, must be prorated. Fully deductible expenses (like advertising or a repair done only in the rental area) can be claimed in full.

Here’s how Robert’s expenses break down:

Mortgage interest: $12,000 × 25% = $3,000 deductible
Utilities: $3,200 × 25% = $800 deductible
Property tax: $3,674 × 25% = $918.50 deductible
Advertising: fully deductible = $114.25
Repairs (renter’s bathroom): fully deductible = $2,148.20

Now, let’s total the deductible amounts.

Total deductible expenses = 3,000 + 800 + 918.50 + 114.25 + 2,148.20
Total deductible expenses = $6,980.95

5. Determining Net Rental Income

Robert’s rental income and deductible expenses are as follows:

Gross rental income: $11,400
Total deductible expenses: $6,980.95

Net rental income = $11,400 − $6,980.95 = $4,419.05

This amount is reported as net rental income on Robert’s T776 form and then flows to line 12600 of his personal income tax return (T1).

6. Shared Ownership Situations

If Robert owned the property jointly with his spouse, the income and expenses must be split according to ownership share.
For example, if each owns 50%, then:

Each person reports:
Rental income = $11,400 × 50% = $5,700
Expenses = $6,980.95 × 50% = $3,490.48
Net rental income per person = $5,700 − $3,490.48 = $2,209.52

Both Robert and his spouse would each report $2,209.52 on their personal tax returns.

7. Using Professional Judgment

If you’re renting out only a bedroom or shared living space instead of a separate unit, you might not have exact measurements. In that case, use your best reasonable estimate based on the size of the room, access to shared areas, and how much of the home the renter uses.

The CRA expects your calculation to be fair, consistent, and logical.

8. Key Takeaways

Use Form T776 to report rental income and related expenses.
Only claim expenses related to the rental portion of your property.
Use square footage or number of rooms to determine the rental-use percentage.
Some expenses (like advertising or repairs in the tenant’s area) are fully deductible.
The resulting net rental income is reported on your T1 personal tax return.
Co-owners must each report their share of income and expenses.

Example Summary

Gross rent: $11,400
Shared expenses (25% of total): $4,718.50
Fully deductible expenses: $2,262.45
Total deductible: $6,980.95
Net rental income: $4,419.05

Selling Your Home When You’ve Been Renting Out a Portion

Many Canadians occasionally rent out a portion of their home, such as a basement apartment or a spare suite, to earn extra income. If you’re preparing to sell your home, you may be wondering: Do I have to pay tax on the sale? How does renting part of my home affect capital gains? Let’s break it down in simple terms.

When Renting Doesn’t Affect Your Home Sale

In most cases, renting out a small part of your home does not trigger capital gains tax when you sell. The Canada Revenue Agency (CRA) recognizes that people often rent a minor part of their property while still living in it as their principal residence.

Here are the key conditions for tax-free treatment:

The rented portion is small
- If the rented area is a small percentage of your home—like a basement suite making up 20–30% of the total space—it is usually considered minor.
- Problems may arise if the rental space is very large, say around 50% of the home. In that case, the CRA may question whether the home is still mainly your principal residence.
No major structural changes were made to rent it out
- Minor renovations, like finishing a basement or adding drywall, are typically okay.
- Large structural changes intended to create rental space—such as adding a second floor or significantly expanding the home—could lead to taxable capital gains.
You did not claim Capital Cost Allowance (CCA)
- CCA is a depreciation deduction you can claim on rental property to reduce taxable income.
- If you claim CCA for the rented portion of your home, the CRA treats that part more like an investment property, not part of your principal residence. This means tax could be owed on that portion when you sell.

What Happens if These Conditions Aren’t Met

If one of the above conditions isn’t met, only the rented portion of your home may be subject to capital gains tax.

For example:

Imagine your home sells for a $100,000 capital gain.
You rented out 25% of your home and claimed CCA on it.
In this case, $25,000 of the gain (the rented portion) would be taxable, while the remaining $75,000 stays tax-free as your principal residence.

This is why tax professionals often advise clients not to claim CCA on a portion of a principal residence being rented. While claiming it might give a short-term tax deduction, it can create future tax obligations through something called recapture, where you must “pay back” the benefit you claimed.

Key Takeaways for Homeowners

Renting out a small part of your home does not automatically mean you’ll owe tax when selling.
Keep the rented space proportionally small (less than 50%) and avoid major structural renovations just to create rental space.
Avoid claiming CCA on the rented portion if you want to maintain the tax-free status of your principal residence.
Only the portion of the home used as a rental and with CCA claimed may trigger capital gains tax.

By following these rules, you can rent out a portion of your home safely without creating unexpected tax consequences when you eventually sell.

Renting Out a Vacation or Other Personal Property

Many Canadians own vacation homes, cottages, or other personal properties and consider renting them out, either to cover maintenance costs or to earn extra income. If you’re new to taxes, you may wonder how this affects your tax return and which expenses you can claim. Let’s break it down.

Understanding Personal Use vs. Rental Use

The key difference between renting a portion of your principal residence and renting a vacation property is how personal use is measured:

For a principal residence, the focus is usually on the size of the rented portion (e.g., a basement suite).
For a vacation or personal property, the focus is on time—how many days or weeks you used the property personally versus how long it was rented or available for rent.

Example: Personal Use Percentage

Imagine John and Nicole own a chalet in Ontario. They enjoy using it for six weeks a year for skiing and summer activities. The rest of the year, 46 weeks, the property is rented out or available for rent.

To calculate the personal-use portion:

Divide the time they used it personally by the total number of weeks in a year:
- 6 weeks ÷ 52 weeks = 11.54% personal use
The remaining 88.46% of the time is rental use.

This means that only 11.54% of the property’s expenses are considered personal and cannot be deducted for tax purposes. The rest can be claimed against rental income.

Reporting Rental Income and Expenses

All rental income earned from personal or vacation properties must be reported on your tax return. Correspondingly, you can deduct the proportion of expenses related to rental use, including:

Mortgage interest
Property taxes
Utilities
Insurance
Maintenance and repairs

These deductions are prorated based on the rental-use percentage. Using our example, John and Nicole could deduct approximately 88% of eligible expenses against the rental income to calculate their net profit or loss.

Watch Out for Consistent Rental Losses

While claiming rental expenses is allowed, the CRA monitors cases where personal properties consistently show large losses. For instance:

If someone rents a property briefly but deducts most expenses to offset other income, the CRA may question the deductions.
This is because the property is primarily for personal use, and consistent losses could be seen as a way to avoid paying taxes on other income.

Tax practitioners need to be careful and ensure that the rental portion is reasonable, and documentation of personal versus rental use is accurate.

Key Takeaways

For vacation or personal properties, rental deductions are based on time, not square footage.
Only expenses proportional to rental use can be claimed.
Income from renting the property must be reported on your tax return.
Consistently claiming large losses on a personal property can attract CRA scrutiny.

By understanding these rules, homeowners can rent their vacation properties responsibly, benefit from deductions, and stay on the right side of the CRA.

How to Prepare the T776 When a Vacation or Cottage Property is Rented Out

If you own a vacation property, cottage, or other personal property and rent it out, you need to report both the rental income and the expenses on your tax return. In Canada, this is done using Form T776 – Statement of Real Estate Rentals. Let’s walk through how this works in a simple, beginner-friendly way.

Step 1: Separate Personal Use from Rental Use

For vacation or personal properties, you must divide the property’s use between personal time and rental time:

Personal use: Time you or your family actually use the property for your own purposes.
Rental use: Time the property is rented out or available for rent.

Example:
John and Nicole own a chalet in Ontario. They use it personally for 6 weeks each year and make it available for rent for the remaining 46 weeks.

Personal use: 6 ÷ 52 weeks = 11.5%
Rental use: 46 ÷ 52 weeks = 88.5%

This percentage will determine how much of the property’s expenses you can deduct.

Step 2: Collect All Rental Income and Expenses

Before filling out T776, gather:

Rental income: Total money earned from renting the property.
Expenses: Includes mortgage interest, property taxes, insurance, utilities, maintenance, repairs, and advertising.

Some expenses, like advertising for rentals, are fully deductible because they are directly related to earning rental income. Other expenses, like repairs or utilities, must be prorated based on personal use.

Example:

Total expenses: $25,000
Personal portion: 11.5% = $2,875 (non-deductible)
Rental portion: 88.5% = $22,125 (deductible against rental income)

Step 3: Calculate Net Rental Income or Loss

Net rental income or loss is calculated by subtracting deductible expenses from rental income.

Example:

Rental income: $24,700
Deductible expenses: $22,125
Net rental profit: $2,575

This net income is then reported on your personal tax return. If the property is co-owned, each owner reports their share. In John and Nicole’s case, each would report half of the net rental profit.

Step 4: Be Careful with Rental Losses

While deducting expenses is allowed, the CRA monitors consistent losses on personal-use properties. For example:

If John and Nicole only earned $8,700 but had $22,000 in deductible expenses, they would show a $13,300 rental loss.
The CRA may question whether the property was genuinely available for rent or if the losses are being used primarily to offset other income.

To avoid problems:

Keep accurate records of rental availability.
Maintain receipts for expenses.
Document efforts to rent out the property (advertisements, rental agreements, etc.).

The CRA may allow a few years of modest losses, but consistent large losses could trigger a review.

Step 5: Fill Out the T776 Form

When completing T776, you will:

Enter the property address.
Record total rental income.
List all expenses, separating deductible rental expenses from non-deductible personal portions.
Calculate the net rental income or loss.
Allocate income or loss to each co-owner if applicable.

This ensures the CRA receives a complete and accurate report of rental activity.

Key Takeaways:

Divide property use between personal and rental time for vacation properties.
Only the rental portion of expenses is deductible.
Keep good records to support the rental claim, especially if reporting a loss.
Net rental income is reported on your tax return; co-owners split income or loss proportionally.
Consistent or excessive losses on personal properties may trigger CRA questions.

By following these steps, you can safely report rental income from vacation or cottage properties while staying compliant with CRA rules.