Old Ottawa South, Ottawa
Old Ottawa South: a family home with a suite in the basement
Old Ottawa South is a neighbourhood of older houses held by the same families for a long time, close enough to Carleton that adding a self-contained unit makes obvious sense. It is also where the largest untaxed asset most households own, the family home, quietly stops being entirely a family home. A basement apartment with its own entrance and kitchen is not the same thing as a spare room, and the tax system knows the difference. The consequences do not appear while the suite is being rented. They appear on the sale, sometimes decades later, when the exemption that was supposed to cover the whole gain turns out to cover only part of it.
Why Old Ottawa South is its own case
The principal residence exemption shelters the gain on a home you ordinarily inhabited, for the years you designate it, and one family unit can designate only one property for any given year. The design of the formula also means a year of overlap is effectively forgiven when you move between homes. What it does not do is shelter the part of a property that has been converted to earning income.
Whether a conversion has happened is the question. Where an owner rents part of a home in a way that stays secondary to living there, has not made structural alterations to make the space more suitable for rental, and claims no capital cost allowance, the CRA's position is that the whole property remains a principal residence. A purpose-built self-contained unit with its own entrance, kitchen and bathroom is much harder to describe that way. Building one is normally a partial change in use, which means a deemed disposition of the converted portion at fair market value at the time and a portion of every future gain falling outside the exemption. An election exists that can defer the effect of a change in use, and its availability and consequences differ depending on which direction the change went, so it is worth looking at before the renovation is finished rather than at the closing table.
While the suite is rented, the ordinary rental rules apply and the apportionment is what gets audited. Costs that relate only to the unit are fully deductible. Costs of the whole house, including mortgage interest, property tax, insurance, heat and water, are split on a reasonable basis, normally by floor area, and applied consistently. Capital cost allowance is available on the rental portion and is almost always the wrong choice for someone who intends to sell the house one day. And a newly built or substantially renovated unit that is rented to a long-term tenant may qualify for a rebate of part of the HST embedded in the construction, which has its own application deadline and is lost if nobody files it.
The work, as it applies here
Tax Expertise
Rental income from a secondary suite reported with a defensible apportionment, and the principal residence position documented so the sale of the house is not a reconstruction exercise.
Detailed Bookkeeping
A record of what the suite cost to build and what it costs to run, separated from household spending, with the capital and current items kept apart from the start.
Strategic Planning
Costing a suite before it is built, including the change in use consequences and any HST rebate on the construction, and planning how the house will eventually pass to the next generation.
Questions from Old Ottawa South
- We built a self-contained apartment in the basement. Does that affect the principal residence exemption?
- Very likely, yes. Creating a unit with its own entrance, kitchen and bathroom is a structural change that makes the space more suitable for renting, which takes you outside the administrative position that lets a home stay wholly a principal residence while part of it is rented. The usual result is a partial change in use: a deemed disposition of that portion at its fair market value when the change occurred, and a share of the future gain that the exemption will not cover. Knowing this before the work is done lets you record the value at the right moment and consider the available election.
- Our adult son lives in the basement and pays us a little toward costs. Is that rental income?
- Not necessarily. Where a family member pays an amount below what an arm's length tenant would pay, the CRA's position is generally that you are not carrying on a rental operation with a view to profit, which means you do not report the payments as income and you cannot deduct expenses or claim a loss against them. What you cannot do is take the middle path of deducting the house costs while treating the payments as a gift. If you charge a genuine market rent, it is rental income and the ordinary rules and deductions apply.
- Do I have to report the sale of my house if the whole gain is exempt?
- Yes. Since the reporting requirement was introduced, the disposition of a principal residence must be reported on the return for the year of sale along with a designation form, even when the exemption eliminates the entire gain. Failing to report it can result in a penalty and, at the CRA's discretion, denial of the exemption, and late-filing the designation carries its own penalty that accrues per month. This is not the old rule that many long-time homeowners still have in mind, and it catches people who sold and assumed there was nothing to file.
- How do I split expenses between our part of the house and the apartment?
- On a reasonable basis you can explain and then stick to. Floor area is the usual measure: the square footage of the unit as a share of the total finished area, sometimes adjusted where the tenant has use of common space such as a shared laundry or a parking spot. Anything that relates only to the suite, such as a repair inside it or a separately metered utility, is fully deductible. Anything covering the whole property gets the percentage. Changing the method between years without a reason is one of the things most likely to draw a question.
- Can I claim capital cost allowance on the rental portion?
- You are permitted to, and it is usually a poor trade. Claiming depreciation on the rental part of your home is the clearest possible indication that the space is being used to earn income, which undermines any argument that the property remained wholly your principal residence. It also produces recapture on the sale, bringing the previously deducted amounts back into income in a year when you may already have a gain to deal with. For most owners the annual saving is small and the cost at sale is not.
- We had the suite built new. Is there an HST rebate?
- There may be. A rebate exists for part of the HST embedded in newly constructed or substantially renovated residential premises that are rented out as a place of residence on a long-term basis, and a self-contained unit added to an existing house can qualify as an addition. It is claimed by the landlord rather than given at the till, it has conditions about the nature and length of the first tenancy, and it has an application deadline measured from the relevant date. Keep the construction invoices with the HST shown, because the claim is built from them.
Reading that applies
Also covered by this page
These neighbourhoods raise the same questions as Old Ottawa South and are handled here.
- Old Ottawa East The strip between the canal and the Rideau River that was an independent village before the city took it in.
- Rideau Gardens A small enclave on the river side of Old Ottawa East, with houses backing onto the Rideau.
- Billings Bridge The crossing named for the Billings family, whose 1828 estate house still stands above the river.
- Mooney's Bay The beach and park where the Rideau widens above Hog's Back Falls.