Can You Rent Your Current Home Out and Rent a Different One?

The government treats landlords as business owners. That means you must know the laws surrounding rentals through and through. The Residential Tenancies Act (RTA) governs a landlord’s legal duties. The hiccup here is that the RTA changes frequently, and keeping up with legal compliance falls entirely on your shoulders. Not only are you responsible for operating a business, but you’re also in charge of maintenance, tax compliance, and there is a risk when renting properties that we should discuss.

The Real Tax Implications: Capital Gains & Income Tax

Owning a rental property carries major tax implications that directly affect your retirement funds.

Losing Your Primary Residence Tax Exemption

For many homeowners, the moment you move out and rent your home, it shifts status from a home to an investment property. This means it loses its full Primary Residence Exemption. Any future appreciation on the property becomes subject to capital gains tax.

Example: If you move out when your home is valued at $1,000,000, and 10 years later you sell it for $1,300,000, that $300,000 in capital growth is subject to capital gains tax treatment. Capital gains will tax half of that $300,000 at your marginal tax rate, which can impact your finances and taxes quite significantly if you’re claiming CPP, OAS, and a pension.

Rental Income Is Taxable Income

Any net income you generate from the rent, after deducting eligible expenses like property taxes, maintenance, and mortgage interest, is treated as taxable income. This added income could potentially push you into a higher tax bracket or impact income-tested government benefits.

The Tax Relief Exception: Subsection 45(2) Election (This can help avoid capital gains taxes for short-term relocations).

There is an important tax rule that some homeowners miss. Under the Canada Revenue Agency’s (CRA) Subsection 45(2) Election, you can elect to defer the “change-in-use” from primary residence to investment property by up to 4 years. Those 4 years can make a meaningful difference in lowering your capital gains taxes in the future, but this is not a long-term solution for downsizes. This exception is great for reducing capital gains taxes, but if you pass 4 years, any further house appreciation will start being subject to capital gains taxes again.

If you plan to buy another home when you move out, you are not eligible for this tax relief.

Note: This requires filing specific paperwork with your tax return for the tax year you move out. It’s important to work with a tax accountant to see what taxes you may owe, as well as what tax incentives you may qualify for. 

Navigating the RTA and LTB in Ontario

Becoming a landlord in Ontario means operating under some of the most protective tenant legislation in North America. The Residential Tenancies Act (RTA) and the Landlord and Tenant Board (LTB) dictate almost every interaction you will have with your tenant. Ontario courts have repeatedly affirmed that the RTA is intentionally favours tenants rights over landlords. It’s designed this way because tenants typically have fewer financial resources and less access to legal representation when compared to property owners.

Your obligations when running a rental business are substantial:

• Maintenance Cannot Be Transferred: You are legally responsible for maintaining the home in a good state of repair. You cannot shift maintenance, repairs, or seasonal upkeep responsibilities to the tenant through lease clauses.
• Strict Eviction Rules: Leases in Ontario never expire; after the initial term, they automatically roll over month-to-month. You cannot end a tenancy simply because the 12-month lease period ends. Aside from severe breaches (like non-payment of rent or major property damage), the primary way to regain possession is serving an N12 for personal use, which legally requires you to pay the tenant one month’s rent in mandatory compensation, and it can only be served to the tenant if you, a family member, or a buyer wants to move into the property.
• Strict Rent Control Restrictions: Properties occupied for residential use prior to November 15, 2018, are subject to Ontario’s annual rent increase guideline (usually capped around 2.5%). If your mortgage rate, property taxes, or utility costs surge, you cannot legally pass those expenses on to your tenant.
• LTB Backlogs and Cash-Flow Risks: If you face non-payment or a tenant dispute, resolving the issue requires an LTB hearing and eviction order. Once requested, a hearing can take 3-6 months until a your court date, and even if an eviction is ordered, that can take several more months. If you’re relying on the tenant’s rent to cover expenses, this could be a significant financial squeeze for a landlord.

Hidden Costs and Operational Demands

Beyond taxes and legal obligations, the everyday management of a rental property demands time, energy, and liquidity.

• Landlord Insurance: Standard homeowner policies do not cover tenant-occupied properties. Converting to a Landlord Insurance Policy often comes with higher premiums and strict requirements regarding property inspections.
• 24/7 Maintenance Responsibilities: As a landlord, you are legally required to keep the property in a good state of repair and compliant with health and safety standards. A middle-of-the-night plumbing emergency or a broken furnace during a freeze requires immediate action and out-of-pocket funding.
• Property Management Fees: If you prefer not to take emergency calls or screen tenants yourself, hiring a professional property management company typically costs 8% to 12% of your gross monthly rent, directly reducing your profits.

The Verdict: Is Renting Out Your Home Worth It?

While holding onto the family home provides emotional comfort, turning it into a rental property introduces legal exposure, unexpected expenses, and active management demands into your retirement years.

We receive many calls from families looking to rent out their primary residence, with the intention to move to another home (either as a rental or as another purchase). In our experience, once they learn their duties, the carrying costs, and the potential legal hiccups, they mostly choose to sell their home and re-invest their equity into another home, or into their savings accounts.

The Math When Renting Out A Property

The GTA is quite notorious for having low rental rates compared to property values. Especially in high demand pockets like Oakville and Burlington, where a $1.8m home might only rent out for $7,000. Let’s take a close look at how that math actually works out when applying basic investing principles.

Value: $1,800,000

Taxes: $12,000

Insurance: $2000

Rental Income: $84,000

Maintenance, repairs, upkeep: $15,000

Vacancy, realtor fees, accountant fees: $13,200

Total annual costs: $42,200

Income after expenses: $41,800

Return On Your $1.8m: $41,800/$1,800,000 = 2% return on investment.

Verdict: While a 2% return on investment is not bad if you’re expecting significant price growth, there are many other investment options with lower risks where you can earn dividends, and capital appreciation.

Disclaimer: This article is for informational purposes only and does not constitute formal legal or accounting advice. Always consult a qualified CPA regarding your specific capital gains exposure and a real estate lawyer regarding your obligations under the Residential Tenancies Act.