Renting a Home to Your Parents or Adult Children Below Market: The Rent, the Loss and the Principal Residence Question, From Move-In to Sale
The family arrangement that feels informal on move-in day gets read again at every tax season it runs through, and once more in the year the property is sold or you move back in. Here is what the Income Tax Act, CRA’s rental guide and Ontario’s Residential Tenancies Act say at each of those points.
If you rent a home to your parents or adult children for less than market rent and lose money, can you deduct that loss from your other income?
No, according to CRA’s guide T4036 Rental Income: if you lose money because you rent to a person you know for less than you would charge someone you don’t know, you cannot claim a rental loss. A loss is allowed only if you charge a relative the same rate as other tenants and expect to make a profit. If the family member only chips in toward upkeep or food, CRA treats it as a cost-sharing arrangement: not reported as income, no rental expenses, no loss. Separately, at sale time the Income Tax Act counts a home ordinarily inhabited by your child toward the principal residence definition, but its list does not name parents.
Source: CRA, T4036 Rental Income (Rev. 25), “Renting below fair market value”; Income Tax Act, s.54 “principal residence” (Justice Laws, 2026)
I’m Arthur Zhao, a real estate broker in the Greater Toronto Area. Picture an owner in the spring after she sold a semi-detached house, sitting with her accountant over Form T2091(IND), the form that asks which years she wants to designate the property as her principal residence. For several of the years she owned it, the person living there was her mother, who paid her a modest amount each month. The answer to the designation question sits in one list inside section 54 of the Income Tax Act. But several other answers that matter just as much were fixed years earlier: whether that monthly amount was income, whether any loss on the property could ever be claimed, and whether anything was deemed sold the day her mother moved in.
So rather than start at the sale, this article walks the arrangement in the order it actually happens: the day the family member moves in, each tax season while they live there, and the year you sell or move back in.
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Move-in day, tax side: has the property started earning income?
Section 45(1)(a) of the Income Tax Act deems you to have sold a property at fair market value, and immediately bought it back at the same amount, when a property you acquired for some other purpose starts being used “for the purpose of gaining or producing income.” Section 45(1)(c) does the same proportionally when the split between income use and other use changes, for example when part of a house starts being rented. CRA’s guide T4036 puts it in plain terms: when you change all or part of your principal residence to a rental, you are considered to have sold it at fair market value, and the gain for the years it was your principal residence is not taxed.
Here is the part neither the statute nor the guide answers directly. If your parent or adult child pays only a small amount toward upkeep, T4036 calls that a cost-sharing arrangement and says you do not report it as income and cannot claim rental expenses. What T4036 does not say is whether such an arrangement counts as starting to use the property to gain or produce income under s.45(1). The trigger in the statute is the purpose of earning income; which side of that line your family arrangement falls on is a question of facts for your accountant, not something the guide settles.
If the arrangement is treated as a change in use and the whole property was your principal residence, T4036 describes an election under s.45(2) to be treated as not having started the rental use. While it is in effect you cannot claim capital cost allowance on the property, you still report the net rental income, and you can designate the property as your principal residence for up to 4 years (longer in certain employer-relocation situations). The election is made by attaching a signed letter to your return.
ℹ️The open question, stated plainly: T4036 tells you how CRA treats a cost-sharing amount (not income, no expenses, no loss). It does not say whether that arrangement is a change in use under s.45(1). Neither the guide nor the statute settles it for a family arrangement; it turns on your facts.
Move-in day, tenancy side: the RTA has no family exemption
Ontario’s Residential Tenancies Act, 2006 lists in s.5 the kinds of living accommodation it does not cover. The only one that mentions family is s.5(i): accommodation whose occupants must share a bathroom or kitchen with the owner, or with the owner’s spouse, child or parent, or the spouse’s child or parent, where that owner or relative lives in the same building.
Read the condition closely. The exemption turns on sharing a kitchen or bathroom with the owner’s household in the same building, not on who the occupant is. A self-contained condo or house let to your parent or adult child does not fit s.5(i). Whether a particular family arrangement is a tenancy in the first place is a question of fact, and the Act does not answer it for you. What the Act does make clear is narrower: if the two of you are in a landlord-and-tenant relationship, the RTA does not step aside because the tenant is family.
Every tax season they live there: what the money counts as
According to CRA’s T4036 (Rev. 25), the starting rule for any rental is that you can deduct expenses only if you incur them to earn income. The guide then describes how that rule plays out when the occupant is someone you know:
- Your child or another person living with you pays a small amount toward upkeep or food. This is a cost-sharing arrangement. You do not report the amount as income, and you cannot claim rental expenses or a rental loss.
- You rent to someone you know for less than you would charge others, and lose money. You cannot claim a rental loss. When rental expenses are consistently more than rental income, the guide adds, you may not be allowed to claim a loss because the rental may not be considered a source of income.
- You rent to a relative at the same rate you would charge other tenants and expect to make a profit. You can claim a rental loss.
Why the distinction matters in money terms: under T4036’s “Rental losses” section, a loss from expenses incurred to earn income can be deducted against your other sources of income. A below-market family rental closes that door. This article does not cover how to fill in the rental statement line by line or capital cost allowance classes; those are covered in a separate piece.
⚠️According to T4036, choosing the s.45(2) election means you cannot claim capital cost allowance on the property while it is in effect, and the net rental income is still reported. Weigh both sides with your accountant before filing it.
The year you sell: whose occupancy counts toward the exemption
The definition of “principal residence” in s.54 of the Income Tax Act requires that the housing unit was ordinarily inhabited in the year by the taxpayer, the taxpayer’s spouse or common-law partner, a former spouse or common-law partner, or a child of the taxpayer. T4036 Chapter 5 phrases it the same way: you, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
That list is where parents and children part ways. It names a child with no age limit, so a home where your adult son or daughter lived can meet the occupancy condition through their occupancy. It does not name a parent, so a home that only your mother or father lived in cannot meet that condition through their occupancy alone. That is a reading of the list itself; how it applies to a specific file, including any years you lived there yourself, is for your accountant to confirm.
If the property shows a loss rather than a gain, T4036 notes that a home is personal-use property, and a loss on its deemed sale through a change in use cannot be claimed.
Still the year you sell: one designation per year, and who is in your family unit
For each year after 1981, paragraph (c) of the s.54 definition allows a property to be designated only if no other property has been designated for that year by you, by a person who was your spouse or common-law partner throughout the year (unless you were living apart under a judicial separation or written separation agreement), or by your child who was unmarried, not in a common-law partnership and under 18.
Two consequences follow directly from that wording. First, a child who is 18 or older, or married, or in a common-law partnership, is outside that group: if your adult daughter owns her own condo and designates it, her designation does not use up your year. Second, the property your family member lived in and the home you lived in yourself draw on the same single designation you have for each year. Choosing which property gets which years is the substance of the T2091(IND) conversation.
The paperwork is fixed: T4036 says you report the sale on Schedule 3 and file Form T2091(IND). CRA can accept a late designation in certain circumstances, but a penalty may apply. The definition also limits the land that counts to half a hectare unless you establish more was necessary for the use and enjoyment of the home.
Or the year you move back in: s.45 reads the use again
Section 45(1) works in both directions. Paragraph (a)(i) covers a property that starts being used to earn income; paragraph (a)(ii) covers a property acquired to earn income that starts being used for another purpose; paragraph (c) covers changes in the proportion. Each of these can produce a deemed sale at fair market value.
So whether moving back in is a tax event depends on the same unanswered question from move-in day: was the family arrangement ever use for the purpose of gaining or producing income? If it was not, there may be no change of use to measure. If it was, the s.45 rules, and any s.45(2) election you filed, shape what happens next. The statute gives the triggers; the facts of your arrangement decide which one, if any, applies.
💡 My own judgment is this: the sale-year question deserves the earliest thought, even though it arrives last. Your family member’s home and the home you live in compete for one designation per year, and a home occupied only by a parent cannot meet the s.54 occupancy condition through the parent. Knowing that on move-in day changes how you think about which property carries the larger expected gain, and it is a conversation to have with your accountant while the facts are still being created, not after the property is sold.
What to keep from the first day, so the later years can be answered
None of the questions above can be answered without dates and amounts. Records that map directly to the rules discussed here:
- The date each family member moved in and out, and whether you lived there at any point in each year (s.54 occupancy; s.45 timing).
- What was paid each month and what it was for: a share of upkeep and food, or rent (T4036 cost-sharing versus rental).
- What comparable units rent for at the time, if you intend to charge the same rate as other tenants (T4036 same-rate condition).
- A copy of any s.45(2) election letter filed with your return.
This is general information about how the rules are written, not tax or legal advice for your situation. Gifting or transferring the property to a family member, and the rules for owners who leave Canada, are separate topics with their own articles.
Filing Rental Income Tax with CRA Form T776: What Landlords Can Deduct, and Why Claiming CCA Depreciation Can Backfire →Gifting Property to Your Children in Ontario: Taxes, Land Transfer Tax, and the Traps →Leaving Canada but Keeping the House: What Happens to Your Principal Residence Exemption When You Sell Later →GTA Market Data (Monthly) →
Frequently Asked Questions
Can I deduct the property tax and condo fees if my daughter just chips in a little each month?
Not according to CRA’s T4036 (Rev. 25). When a child or someone else living with you pays a small amount toward upkeep or food, CRA treats it as a cost-sharing arrangement: you do not report the amount as income, and you cannot claim rental expenses or a rental loss.
If I raise my son’s rent to what a stranger would pay, can I start claiming a rental loss?
T4036 says you can claim a rental loss if you rent to a relative at the same rate you would charge other tenants and you expect to make a profit. The guide also says that when expenses are consistently higher than rental income, a loss may be denied because the rental may not be a source of income, so the profit expectation matters as much as the rate.
My adult daughter owns her own condo. Does her principal residence designation use up mine for the same year?
No. Under paragraph (c) of the principal residence definition in s.54 of the Income Tax Act, the designations that block yours each year are your own, your spouse’s or common-law partner’s, and those of your children who are unmarried, not in a common-law partnership and under 18. A child who is 18 or older, married or in a common-law partnership is outside that group.
When my parents move out and I move back into the house, is that a taxable event?
It depends on whether the family arrangement was ever use for the purpose of gaining or producing income. Section 45(1) of the Income Tax Act deems a sale at fair market value when a property starts or stops being used to earn income, or when the proportion changes. Whether a low-rent family arrangement crossed that line is not answered by CRA’s T4036, so it is a question for your accountant on your facts.
What do I have to file when I sell a house my child lived in?
According to CRA’s T4036, you report the sale on Schedule 3 and file Form T2091(IND) to designate the years you claim as your principal residence. Without the designation there is no exemption; CRA can accept a late designation in certain circumstances, but a penalty may apply.
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