Can I claim the principal residence exemption if I rented part of my home?

Yes, potentially in full, if you qualify under CRA''s administrative exception. If the rental use is "ancillary to the main use" of the property as your personal residence, you made no structural modifications for the rental, and you did not claim CCA on the portion of the building used for rental, CRA allows the full PRE on the property despite some rental activity.

What is the change-in-use rule for principal residences?

When you change a property from personal use to income-producing use (or vice versa), CRA deems you to have sold and reacquired the property at fair market value on the date of the change. This can trigger a capital gain in the year of conversion, even though no actual sale occurred. The Section 45(2) election can defer this deemed disposition.

What is the Section 45(2) election?

Section 45(2) of the Income Tax Act allows you to elect to treat a property that has changed from personal to income-producing use as still being your principal residence for up to four additional years after the change. This defers the deemed disposition. The catch: you cannot claim CCA on the property while the election is in effect.

What if I rented out the entire house and moved elsewhere?

If you moved out and rented the entire property, a change-in-use occurs on the date you vacate. Using the Section 45(2) election, you can still designate the property as your PRE for up to four more years, provided you do not claim CCA and you actually move back in (or sell) within the allowable period. There is a matching Section 45(3) election for converting a rental back to personal use.

How is the PRE calculated when I rented part of my home?

If you do not meet the ancillary exception, the PRE applies only to the portion of your gain attributable to personal use. The allocation can be done by: (1) designating specific years as PRE years in full (if personal use exceeded rental use), or (2) prorating by the percentage of the property that was personal vs rental. The standard PRE formula applies: (1 + Years designated) ÷ Total years owned.

Does renting out a basement suite change the property''s principal residence status?

Under CRA''s administrative position, renting a basement suite generally does not affect the principal residence exemption, provided: (1) the rented portion is minor relative to the whole property, (2) you did not structurally alter the home to create the rental unit, and (3) you do not claim CCA on the building. This is a common scenario; the PRE is available in full for most basement suite landlords who meet these conditions.

Principal Residence Exemption When You Partly Rented Your Home

Short Answer

Renting part of your home does not automatically cost you the principal residence exemption. CRA’s administrative exception covers most basement suite scenarios. However, renting the entire home, making structural changes, or claiming CCA on the building can trigger a change-in-use that must be carefully managed.

CRA’s Administrative Position: The Safe Harbour for Partial Rentals

CRA’s Income Tax Folio S1-F3-C2 establishes an exception that protects most landlords who live in their homes while renting a portion:

Condition	Must be met
Rental use is ancillary to the main use as a personal residence	The home is primarily your personal home
No structural modifications were made to adapt the property for rental	No exterior entrance added, no kitchen added in the rental unit
No CCA claimed on the portion of the building used for rental	The building’s UCC was not reduced by CCA claims

If all three conditions are met, CRA allows the full PRE on the property — you do not need to prorate based on rental vs personal square footage.

Most basement suite scenarios qualify. A finished basement rented to a boarder, without internal/external modification that makes it a separate unit, and without CCA claimed on the building, typically qualifies for this exception.

When the Exception Doesn’t Apply

Scenario	Exception available?
Basement suite with its own entrance added after purchase	No — structural modification
Renting the entire home while you live elsewhere	No — entire property changed use
Claiming CCA on the building	No — disqualified even if only partial
Two-unit home where rental unit is a distinct legal unit	Likely no — may be two properties
Renting for more than 50% of the home by square footage	Likely no — rental exceeds ancillary threshold

The Change-in-Use Rules

When use changes from personal to income-producing (or vice versa), a deemed disposition occurs:

Change type	Tax event
Convert entire home to a rental property	Deemed sold at FMV on conversion date — capital gain on appreciation to that point
Convert rental property to personal residence	Deemed sold at FMV on conversion date — capital gain from rental period
Convert part of home to rental (structural change)	Partial deemed disposition on the converted portion

Section 45(2) Election: Deferring the Conversion Gain

When you convert your principal residence to a rental:

Benefit	Using Section 45(2)
Defer the deemed disposition	No immediate capital gain at conversion
Keep PRE designation for up to 4 more years	Property can still be designated PRE for up to 4 additional years after move-out
No CCA allowed	If claiming CCA, the election cannot be used
Must resume personal use within 4 years (or sell)	If you don’t, the election doesn’t help retroactively

How to file: Attach a letter to your tax return for the year the change of use occurs, stating that you are making the Section 45(2) election for the property.

Section 45(3) Election: Converting Rental Back to Principal Residence

When you move back into a property that was a rental:

Benefit	Using Section 45(3)
Defer the deemed disposition at move-in	No immediate capital gain at time of re-occupation
Can retroactively designate as PRE for up to 4 years before you moved in	Allows PRE to shelter the rental years if fewer than 4
CCA previously claimed may create recapture	CCA claimed during rental period must still be reconciled on sale

The PRE Formula with Partial Rentals

If the ancillary exception does not apply, the standard PRE formula governs:

$$\text{Exempt gain} = \frac{1 + \text{Years designated as PRE}}{\text{Total years owned}} \times \text{Capital gain}$$

Example: You owned for 15 years. You rented the full property for 3 years (years 1–3) using Section 45(2) election. You lived there for 12 years (years 4–15). Capital gain: $400,000.

Years you can designate as PRE: years 1–3 (via election) + years 4–15 = 15 years
PRE fraction: (1 + 15) ÷ 15 = 1.067 → capped at 100%
Entire gain is exempt

Without the election:

Years designated: years 4–15 = 12 years
PRE fraction: (1 + 12) ÷ 15 = 86.7%
Exempt: $400,000 × 86.7% = $346,666
Taxable: $400,000 − $346,666 = $53,334

Disposition Filing Requirements

When you sell a home that you rented even partially, you must file a Principal Residence Designation:

Form	When to use
Schedule 3 + T2091(IND)	Always file when designating a principal residence — required since 2016 even for fully exempt sales
T664	Election for change-in-use under s.45(2) on prior year returns (if amending)

CRA has been matching property sale data with T1 filings since 2016. Failure to file the T2091 can result in a $100/month late filing penalty capped at $8,000.

Bottom Line

Renting part of your home while living there usually does not affect the principal residence exemption, provided you haven’t structurally adapted it for rental and haven’t claimed CCA. The change-in-use rules matter most when you vacate the entire property — Section 45(2) is a powerful tool to preserve PRE eligibility for up to four additional years, but requires proactive filing and ties your hands on CCA.

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