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Capital Gains On A Basement Rental

A recent visitor to Canadian Tax Resource [1] asked the following question about my article on Rental Property and Tax Planning [2]:

I am renting out my basement (50% of the home). Can I avoid paying tax on capital gains when I sell by not claiming a CCA deduction??

See your comment below. If you are renting a portion of your principal residence (i.e. your basement) and you claim CCA, be aware that you will be required to pay tax on a portion of any capital gain on the disposition of your residence.

The CRA produces a publication called Rental Income [3] document T4036 which does an excellent job of explaining all of the issues related to renal income and the associated capital gains.

Renting Your Property And Change In use Rules

Typically, when you change all or part of your principal residence to a rental property, you are considered to have sold the rental portion of the property at its fair market value immediately before the change. Normally this means you claim the principal residence exclusion and there are no immediate tax consequences.

You are also considered to have acquired the same property at its fair market value immediately after the change in use. This re-acquisition is used as your cost base to determine the capital gain when you ultimately sell the property or change the use back to a principal residence.

Exclusions To The Change In Use Rules

If you decide to rent out a basement or other rooms in the house, you are not considered to have changed use if:

Meeting these requirements means the property continues to qualify as a principal residence.

In reading CRA interpretation bulletins, it appears that the CRA’s position is that if the basement unit is fully self-contained and is rented on an on-going basis will cause a change in use outlined above. If on the other hand, the basement has a shared entrance or if the rental of the unit is periodic and sporadic, it is unlikely a change in use would be triggered.

If you are unclear as to the status of the basement property, you may contact the tax services office servicing your area to review the facts of your particular case. You may also obtain an advanced tax ruling from the CRA, in which the CRA will provide a proper interpretation and ruling to which you may rely on if there is a dispute.

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