--- title: "Principal Residence Exemption & Business Use | EverStone" url: https://www.everstonecpa.com/blog/principal-residence-exemption-business-use description: "Running a business from home rarely costs the principal residence exemption, but three conditions decide it and one is capital cost allowance. See them." type: guide updated: 2026-10-08 summary: "Running a business from a home does not normally affect the principal residence exemption. The CRA generally leaves the exemption intact where the business use is relatively small, no structural changes are made to suit the business, and no capital cost allowance is claimed on the business portion." faq_count: 6 publisher: EverStone CPA Inc., a Chartered Professional Accountant firm registered with CPA British Columbia and CPA Alberta service_area: British Columbia, Alberta, Ontario and Manitoba language: en-CA contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online --- [Home](https://www.everstonecpa.com/) [Blog](https://www.everstonecpa.com/blog) Principal Residence Exemption and Business Use Principal residence # Running a business from home: *what it does to the principal residence exemption* By EverStone CPA · Reviewed August 2026 · 8 min read For most Canadian business owners, the family home is the largest tax-sheltered asset they will own. Does working from it put that shelter at risk? Usually not, provided three conditions hold, and one of them is a deduction many owners claim without thinking. **Quick answer:** Running a business from a home does not normally affect the principal residence exemption. The CRA generally leaves the exemption intact where the business use is relatively small, no structural changes are made to suit the business, and no [capital cost allowance](https://www.everstonecpa.com/blog/capital-cost-allowance-cca-classes-canada) is claimed on the business portion. All three, or that portion of the home changes use. ## What the principal residence exemption actually is A home that was your principal residence every year you owned it generally sells tax-free. It qualifies for a year if it is a housing unit (house, condo, apartment, cottage, mobile home or houseboat) you own, you, your spouse or common-law partner, or a child lived in it that year, and you designate it. For a rental-only property, see [selling a rental property](https://www.everstonecpa.com/blog/selling-a-rental-property-canada-tax). Two limits apply: **one property per family per year** for 1982 and later, and generally **half a hectare (1.24 acres)** of land, unless more was needed for the home, such as a larger municipal minimum lot size. Even where the whole gain is exempt, the sale must still be reported: on Schedule 3 and Form T2091(IND) for the year of disposition. ## The three conditions that protect the exemption Using part of your home for rental or business is usually a partial change in use, with a deemed disposition of that part. It *does not* apply if **all three** of these are true: - the rental or business use of the property is **relatively small** about its use as your principal residence; - you make **no structural changes** to the property to make it more suitable for rental or business purposes; and - you **deduct no capital cost allowance** on the part used for rental or business. Meet all three and an ordinary home office is a non-event for the exemption. Fail any one and there is generally a deemed disposition of the affected portion at its proportionate share of fair market value. **Running a business or renting part of your home?** We work out the claim each year so the principal residence exemption stays intact when you sell; personal returns start at $125 and self-employed or rental returns are commonly $275–$500. See [our personal tax service](https://www.everstonecpa.com/personal-taxes), or [get a quote](https://www.everstonecpa.com/book-online?service=personal#enquiry-form). [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=personal#enquiry-form) ## The CCA trap Of the three, [capital cost allowance](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance.html) is the trap. The building is depreciable and software will calculate the claim, but the modest deduction makes the business portion taxable on all future appreciation. On a long-held home, that trade rarely pays, so claim operating costs only, as our guides to the [home office deduction for incorporated owners](https://www.everstonecpa.com/blog/home-office-deduction-corporation-canada) and [home office expenses](https://www.everstonecpa.com/blog/home-office-expenses-incorporated-business-canada) advise. Designate on form T2091(IND). See [why every sale has had to be reported since 2016, even when no tax is owed](https://www.everstonecpa.com/forms/t2091). ## Since 2019, an election is available Before 19 March 2019 there was no election out of the deemed disposition on a *partial* change in use. Since then, depending on the circumstances, an election under subsection 45(2) or 45(3) can prevent it. Where a deemed disposition does occur, you can still designate the affected portion for the year of the change by completing Part 2 of Schedule 3 and page 2 of Form T2091(IND). Our guide to [change in use rules](https://www.everstonecpa.com/blog/change-in-use-rules-property-canada) sets out both elections. ## What happens on the eventual sale If a portion of the home did change use, the sale is handled in parts: - Split the selling price between the principal residence part and the rental or business part. The CRA will accept a split based on square metres or number of rooms, provided it is reasonable. - Report the capital gain on the rental or business portion. - Claim the principal residence exemption on the portion that never changed use, via Schedule 3 and Form T2091(IND). No gain is reported on that part. Record floor areas, the dates the use changed, and fair market value at each change. Keep these with your [permanent tax records](https://www.everstonecpa.com/blog/cra-record-retention-how-long-to-keep-records), not the year’s receipts. ## Renting part of the home is the higher-risk version A basement suite is a bigger use than a home office, often with structural changes and a tempting CCA claim, so the three conditions are easier to fail. If you rent part of your home, analyse the change in use properly and split expenses reasonably before claiming. ## The bottom line A home office rarely costs you the exemption. Keep business use modest, make no structural changes for it, and claim no CCA on the building. For larger uses or a suite, confirm the position before claiming. An [accountant in Abbotsford](https://www.everstonecpa.com/accountant-abbotsford) can settle it in one conversation. Sources - [Canada Revenue Agency — Principal residence and other real estate (qualification, designation, changes in use)](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate.html) - [Canada Revenue Agency — Guide T4036, Rental Income (renting part of a property you live in)](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income.html) This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and your situation is unique, so please [speak with a CPA](https://www.everstonecpa.com/book-online?service=personal#enquiry-form) before acting on anything here. About this article **EverStone CPA** Prepared and reviewed by a CPA at EverStone CPA, serving businesses in BC, Alberta, Ontario and Manitoba. [About the firm →](https://www.everstonecpa.com/about) · [Send an enquiry →](https://www.everstonecpa.com/book-online?service=personal#enquiry-form) Working through this locally? We advise owners on it as an [accountant in Abbotsford](https://www.everstonecpa.com/accountant-abbotsford). ### Keep reading [Change in use rules →](https://www.everstonecpa.com/blog/change-in-use-rules-property-canada) [Home office deduction for incorporated owners →](https://www.everstonecpa.com/blog/home-office-deduction-corporation-canada) [Personal tax (T1) →](https://www.everstonecpa.com/personal-taxes) Common questions ## Frequently asked questions **Does a home office affect my principal residence exemption?** Usually not. There is generally no partial change in use if business use is small, you make no structural changes for it, and you claim no capital cost allowance on that portion. **Why should I not claim CCA on my home office?** It breaks one of the three conditions, so a share of all future appreciation on that portion becomes taxable in exchange for a modest annual deduction. On a long-held home, that rarely pays. **How much land is covered by the principal residence exemption?** Generally half a hectare (about 1.24 acres), including the land under the home. More qualifies if necessary for the home, such as a municipal minimum lot size above half a hectare. **Do I have to report the sale if the whole gain is exempt?** Yes. A disposition of a property that was at any time your principal residence must be reported on Schedule 3, Capital Gains or Losses, and on Form T2091(IND), Designation of a Property as a Principal Residence by an Individual. The designation is made at the time of sale. Failing to report the disposition can put the exemption itself at risk. **What if I rent out my basement suite?** The same three conditions, but a suite fails them more easily: larger use, structural changes, tempting CCA. If one fails, that portion is deemed disposed of at fair market value, and the sale price is later split between exempt and taxable parts. **Can I elect out of a partial change in use?** Since 19 March 2019, often yes. An election under subsection 45(2) or 45(3) of the Income Tax Act can stop the deemed disposition on a partial change in use. If one occurs anyway, you can still designate the affected portion. ## Working from home, or renting part of it? Tell us how much of the home you use and how. A CPA replies by email within one business day with the safe way to claim it and a fixed fee for the return. [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=personal#enquiry-form)[Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) ## Have a question about this? Ask free through [the quick-question form](https://www.everstonecpa.com/quick-question); a CPA replies by email within one business day. A 45-minute **Advice Call** with a CPA is $225 plus GST, booked with a secure payment link and credited to your first invoice if you become a client within 60 days. Want us to take it on? [Send an enquiry](https://www.everstonecpa.com/book-online?service=personal#enquiry-form). [Ask a Free Question](https://www.everstonecpa.com/quick-question) [Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) Email info@everstonecpa.com ★★★★★ “…He is very knowledgeable and has saved me tons in taxes by restructuring my group of companies — the best accountant I've worked with in the last 10 years, after switching from three different firms.” Matt Hildebrandt · Google review **Run your own numbers with the free calculators:** [verify your payroll deductions](https://www.everstonecpa.com/payroll-deduction-calculator) · [estimate what you owe in GST/HST](https://www.everstonecpa.com/gst-hst-calculator) · [Incorporation savings calculator](https://www.everstonecpa.com/incorporation-calculator) [← Prepaid expenses at year end: what has to be deferred](https://www.everstonecpa.com/blog/prepaid-expenses-year-end-canada) [Professional dues and subscriptions: what is deductible →](https://www.everstonecpa.com/blog/professional-dues-subscriptions-deductible) --- Source: https://www.everstonecpa.com/blog/principal-residence-exemption-business-use Prices: https://www.everstonecpa.com/pricing · Contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online