Basement suite rental income in Canada is reported as rental income when you rent space and provide only basic services, using Form T776 and Guide T4036. You deduct the rental share of eligible expenses. Capital cost allowance on the building is optional in the arithmetic and serious for the principal residence exemption. This page is for someone who already has, or is about to have, a legal suite or a rented room and needs the tax map. It is not a permit guide.
Whether the city will let you build the suite is renting out a room or basement suite. Which form applies when you also provide meals or cleaning is T2125 vs T776.
Which form does basement rent go on in Canada?
Basement rent goes on Form T776 when it is rental income from real estate and you provide basic services only. The CRA’s rental or business page says you look at the number and kinds of services. Heat, light, parking, and laundry are the basic services named there. Guide T4036 says to use the business guide instead if the rental operation is a business.
The completing T776 page is where you list the property and calculate income, expenses, and any capital cost allowance. Total gross rental income from that form is entered on line 12599 of the return. Net rental income goes on line 12600. Co-owners report the gross rent of the whole property on line 12599, not only their share. Read the form before you split the gross.
The CRA sharing economy page uses the same split. Extra services such as meals, cleaning, and tour-style reservation fees are generally a business on Form T2125. Basic occupancy services stay with rental income and T776. If you charge one price that mixes room and meals, do not put the same dollars on both forms.
Which basement suite expenses can you deduct in Canada?
You can deduct the rental portion of current expenses you incur to earn the rental income, when Guide T4036 allows them. Common lines include advertising, insurance, interest, maintenance and repairs, property taxes, and utilities. A new roof on a house you also live in is not 100 percent rental. The CRA’s principal residence page says that when only part of a home produces income, you split the selling price and the adjusted cost base between the personal part and the income part using square metres or the number of rooms, as long as the split is reasonable. Use the same kind of reasonable split for expenses during the year. A guess that “the basement feels like half” is weaker than a floor-area measurement.
Land is not depreciable. A renovation that is a capital improvement is not a same-year repair. Guide T4036 is the list. Keep invoices with record keeping.
Illustrative example
This sketch uses assumed numbers so you can see a split. It is not a CRA calculation and not your house.
Suppose the legal suite is 40 square metres and the whole house is 160 square metres, so the suite is 25 percent of the floor area. Suppose annual gas, electricity, and insurance that serve the whole house total $4,000, and you have no separate meter. A floor-area split is 0.25 × $4,000 = $1,000 as the rental share to test against T4036. Suppose rent is $1,200 a month for 12 months, so gross rent is $14,400. Suppose the only other rental cost is that $1,000. Net before capital cost allowance is $14,400 − $1,000 = $13,400. If you also live in the suite part of the year, the personal months stay out. Change the square metres and the result changes.
What happens if you claim capital cost allowance on a house you live in?
Claiming capital cost allowance on the rented part of a house you live in can change how the principal residence exemption works. The CRA principal residence page says the CRA will usually still treat the whole property as a principal residence, even though you used it to produce income, only when all of these are true:
- The income-producing use is ancillary to the main use of the property as a residence.
- There is no structural change to the property.
- No capital cost allowance is claimed on the property.
The page gives a home day care as the kind of situation that can meet those conditions. A basement you alter with a kitchen, a separate entrance, or other structural work is the opposite of “no structural change.” Read that page before you decide the rental use is “small.”
On a partial change in use, the same page says the CRA usually considers you to have changed the use of that part unless all of the following apply:
- Your rental or business use is relatively small in relation to use as your principal residence.
- You do not make any structural changes to make the property more suitable for rental or business.
- You do not claim capital cost allowance on the part you use for rental or business.
If you do not meet all of those conditions, the page says you have a deemed disposition of the portion that changed use, and you are deemed to reacquire that portion at its share of fair market value. You can designate the principal-residence years for that portion using Schedule 3 and Form T2091(IND). Since March 19, 2019, the page says you may elect under subsection 45(2) or 45(3) of the Income Tax Act so that the deemed disposition on a partial change in use does not apply. An election that keeps the principal-residence treatment has a cost: the page says that if you elect not to be considered as having started to use the home as a rental property, you cannot claim capital cost allowance on it. You still report the net rental income.
The change from personal to rental use page explains how the capital cost of the building is set when use changes, using fair market value and, when value is above original cost, a chart. Land is brought in at fair market value. This guide does not complete that chart for you.
Guide T4036 also says you cannot claim capital cost allowance to create or increase a rental loss. A loss produced only by CCA is not a target. Recapture can apply later if you sell and the proceeds exceed the undepreciated capital cost. The principal residence page’s duplex example shows a recapture calculation on the rented portion. Use your own UCC, not that example’s dollars.
Many people who rent a room and still want the full principal-residence exemption claim operating costs and claim zero CCA on the building. That is a choice you make by reading the CRA pages. It is not an order from this guide. Software such as Wealthsimple Tax or TurboTax Canada can carry a T776 into the return. The software does not decide the change-in-use question. Compare the current price. An accountant is the right call when a kitchen was added.
Does GST/HST apply to basement rent in Canada?
Long-term residential rent is generally exempt from GST/HST. Memorandum 19.2.2 says a rental of a residential complex or a unit in it is exempt when an individual will use it as a place of residence or lodging and the rental is continuous occupancy, or a right of occupancy, of one month or more to the same individual. It also says a rental of $20 per day or less is exempt regardless of length, if the occupation is as a residence or lodging. Short-term accommodation of less than one month is taxable if you are a registrant, unless the consideration is $20 or less per day.
You do not charge GST/HST on exempt rent. You also do not claim input tax credits on purchases you make to provide that exempt supply. The $30,000 small-supplier test is about taxable supplies. Exempt residential rent is not a reason to skip reporting the income, and it is not the same figure as the income-tax lines. The short version of that mix-up is the $30,000 GST/HST myth.
Meal plans can be exempt together with long-term accommodation when memorandum 19.2.2’s conditions are met, including a minimum of ten meals a week supplied for a single consideration. Do not assume every board arrangement qualifies. If the meals are a separate business, T2125 vs T776 is the form question.
What should you keep for a basement rental in Canada?
Keep the lease, the rent received, the floor-area or room split you used, and every bill you divided. If you built the suite, keep permits and invoices. Those papers support both the expense claim and, later, the adjusted cost base. A year-end list is the free side hustle tax checklist. Set aside money for the tax on net rental income the way you would for other side income, using how much tax to set aside. This is not tax, legal, or insurance advice.
Which guides sit next to basement suite taxes in Canada?
The practical steps and city rules are renting out a room or basement suite. Form choice is T2125 vs T776. Reporting other side income is how to report side hustle income. The short answers are in the side hustle tax FAQ.
What are the common questions?
Do I file Form T776 for a basement suite in Canada?
Yes, when the rent is income from real estate and you provide only basic services such as heat, light, parking, and laundry. Gross rental income goes on line 12599 and net rental income on line 12600. Extra services such as meals can be business income on Form T2125. This is not tax advice.
Can I deduct all of my mortgage interest and utilities?
You deduct the rental portion of eligible expenses. The CRA says a split by floor area or by number of rooms is acceptable when it is reasonable. The personal portion stays out.
Will capital cost allowance affect my principal residence exemption?
It can. The CRA says a partial rental use usually leaves the whole property as a principal residence only if the rental use is relatively small, you make no structural changes, and you claim no capital cost allowance. A new kitchen or separate entrance is a structural change to take to that page.
Do I charge GST/HST on monthly basement rent?
Generally no. CRA memorandum 19.2.2 says a residential rental of one month or more to the same individual, used as a residence, is exempt. You do not claim input tax credits on costs of that exempt supply. Stays under one month can be taxable.
Can I claim CCA to create a rental loss on the suite?
No. Guide T4036 says you cannot claim capital cost allowance to create or increase a rental loss. Claiming CCA can also limit the principal residence exemption. This is not tax advice.
Which sources support this guide?
The rules, rates, and platform requirements in this guide are checked against these primary sources. Retail price ranges are labelled as ranges to verify locally, and they are not quotes.
- Completing Form T776, Statement of Real Estate Rentals — Canada Revenue Agency
- Guide T4036, Rental Income — Canada Revenue Agency
- Rental income or business income — Canada Revenue Agency
- Principal residence — Canada Revenue Agency
- Changing from personal to rental use — Canada Revenue Agency
- Form T2125, Statement of Business or Professional Activities — Canada Revenue Agency
- Residential real property — rentals (GST/HST memorandum 19.2.2) — Canada Revenue Agency
- Sharing economy — Canada Revenue Agency
- When to register for and start charging the GST/HST — Canada Revenue Agency