Renting out part of the house: tax treatment

Rent out a basement suite and the CRA treats the rented share of your house as a small rental business, reported alongside your regular income every year (Form T776). You report the rent you actually collect, and you deduct a share of the house’s carrying costs against it.

How much you can deduct

CRA’s Guide T4036 splits your expenses into whole-building costs and suite-only costs. Whole-building costs — mortgage interest, property tax, insurance, utilities — are prorated by the share of the house you’re renting, measured by square metres or room count (CRA’s own worked example: renting 3 of 12 rooms lets you deduct 25% of property taxes, electricity, and insurance). Costs that relate only to the rented area — say, a repair inside the suite, or an ad for a tenant — are 100% deductible, no prorating needed. The calculator only models the whole-building, prorated half of this rule; it does not add a separate 100%-deductible suite-only expense line, so its rental deductions are a conservative underestimate relative to what a return prepared by the book could claim.

What you can never deduct

Two things trip people up. First, mortgage principal repayment is never deductible — only the interest portion of a payment counts as an expense. Second, land transfer tax paid at purchase is not a current expense either; it’s added to the property’s cost base instead, which matters later when calculating capital gains at sale, not on this year’s return.

Losses, and a note on vacancy

If your deductible expenses exceed the rent you collect, that rental loss generally offsets your other income — but not automatically. CRA denies the loss for cost-sharing arrangements (a family member chipping in for groceries isn’t a tenancy) and for below-market rent to relatives or other non-arm’s-length tenants, and more broadly wherever there’s no reasonable expectation the arrangement will turn a profit. The calculator’s vacancy-rate input is a cash-flow planning tool only, not a tax concept: CRA’s return reports whatever rent you actually collected in the year, full stop — there is no separate “vacancy deduction” to claim for months the suite sat empty.