Are You Renting Out Part of Your Home? Don’t Overlook the Change in Use Rules!

Recently, I worked with a client who started renting out a portion of their principal residence but didn’t realize this triggered a “change in use” for tax purposes. Unfortunately, they missed reporting this in both 2016 and 2023, and now we’re playing catch-up—an expensive lesson that could have been avoided with early advice.

Here’s what every homeowner and tax preparer should know:

• Change in Use = Deemed Disposition: When you start renting out part (or all) of your principal residence, the CRA generally considers you to have disposed of that portion at its fair market value and immediately reacquired it. This can trigger a capital gain, which is taxable unless you qualify for the principal residence exemption.

• Principal Residence Exemption & Form T2091: To claim the principal residence exemption on the gain, you must designate the property as your principal residence by completing Form T2091 (IND) when you dispose of, or are deemed to have disposed of, all or part of your property. This includes partial changes in use, such as renting out a basement suite or a room.

• Late Filing = Penalties: If you miss filing Form T2091 at the time of the change in use, you can request to file it late, but the CRA may impose penalties. It’s much easier—and less costly—to get it right from the start.

• Tax Preparers: Ask Questions! If you notice a client suddenly reporting rental income when they didn’t in previous years, dig deeper. Was there a change in use? Was the proper election made? Did they file Form T2091? This due diligence can save your clients from future headaches and unexpected tax bills.

• Partial vs. Full Change in Use: Since March 19, 2019, you can elect to defer the deemed disposition on a partial change in use (e.g., renting out only part of your home) by making an election under subsection 45(2) or 45(3) of the Income Tax Act. However, you must not claim capital cost allowance (CCA) on the property if you want to preserve the principal residence exemption.

  
  

Bottom Line: Consulting a tax professional before you start renting out part of your home is like buying insurance—you may not see the benefit immediately, but it can save you from costly surprises down the road. If you’re a tax preparer, be proactive in identifying these situations for your clients.

Don’t wait until it’s too late—get advice early and file the right forms!