How does rental income from a basement suite affect my taxes?

Rental income from a basement suite is considered taxable income by the Canada Revenue Agency (CRA) and must be reported on your annual tax return, but you can also deduct many legitimate expenses to reduce your tax burden.

When you rent out a basement suite in your Ottawa home, you're essentially running a small rental business. The CRA requires you to report all rental income received during the tax year, including rent payments, parking fees, and any additional services you provide. However, the tax implications aren't necessarily negative - many homeowners find that legitimate deductions significantly offset their rental income.

Deductible expenses can include a portion of your home's operating costs such as utilities, property taxes, home insurance, mortgage interest, and maintenance expenses. The key is determining what percentage of your home the rental unit represents. For example, if your basement suite is 800 square feet and your total home is 2,400 square feet, you can typically deduct about 33% of eligible home expenses. You can also deduct expenses specific to the rental unit, such as advertising costs, professional cleaning between tenants, repairs to the rental space, and appliances purchased specifically for the suite.

Capital improvements like finishing the basement, installing an egress window, or adding a separate entrance can often be depreciated over time through Capital Cost Allowance (CCA), though there are specific rules about when to claim this. In Ottawa's current market, many homeowners find that their allowable deductions come close to matching their rental income, especially in the first few years when setup costs are higher.

Important considerations for Ottawa homeowners include keeping detailed records of all expenses and ensuring your basement suite complies with City of Ottawa zoning and building code requirements. Non-compliant suites can create complications if the CRA questions your rental business legitimacy. Additionally, if you later sell your home, a portion of any capital gains may be taxable if you've been claiming CCA on the rental portion.

Professional guidance is highly recommended - consult with a tax professional familiar with rental property rules, as tax laws can be complex and change over time. They can help you maximize legitimate deductions while ensuring full compliance with CRA requirements.

For a properly planned and executed basement suite renovation that meets all Ottawa building codes and zoning requirements, contact Ottawa Basements for a free consultation. A compliant, well-designed rental suite not only generates better rental income but also creates fewer complications come tax time.