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If you meet these three conditions, the whole property may qualify as your principal residence, even though you are using part of it for rental purposes. These conditions could be met, for example, if you run a daycare business in your home, you rent out one or more rooms in the home, or you maintain an office or other work space in the home which you use in running your own business.

If you don’t meet the three conditions, then when you sell your home which contained a rental unit, the tax rules require you to allocate the selling price between the part you used for your principal residence and the part you used for rental purposes. The CRA will accept a split based on square metres or the number of rooms, provided the split is “reasonable.” You must then report any capital gain on the part you used for rental purposes.

A recent CRA technical interpretation released last month clarified how the CRA interprets the factors “ancillary” and “structural change” in the context of the partial change-in-use rules.

In determining whether the income-producing use is “ancillary” to the main use of the property as your principal residence, the CRA stated that it generally interprets ancillary as being “subordinate or secondary to a more important or primary purpose.” The CRA added that there is no specific percentage or threshold which may be used in determining whether the particular change in use of a particular property is, indeed, ancillary to the use of the property as the taxpayer’s principal residence. Such determination can only be made “by a review of the particular facts and circumstances in each case.”