3. BasementRentalApartment Ronda and her husband, Ronald, live in a 2,400 square foot detached home north of Toronto. They purchased their home in 2012 for $600,000. In 2015, the couple had their roof completely redone for $15,000. In late 2017, Ronda and Ronald discussed how they never use their basement anymore, so on February 1, 2018, the couple began renting it out to a newly engaged couple. Prior to the new tenants moving in, Ronda and Ronald purchased a new bed, area rug and other furniture. When they were getting things in order to rent out the basement, Ronda and Ronald expressed how happy they are that they purchased this home back in 2012. Friends of theirs, Kim and Ken, rented out their basement a couple years ago in 2016 and had to build a separate entrance to their basement so that the tenants did not have to go through the main entrance of the home. Luckily, Ronda and Ronalds home came with separate walk-out entrance to the basement. Ronald only had to install a new lock on the door for the future tenants. Ronda and Ronalds basement is approximately 800 square feet. In early 2018, Ronald recalls reading in the newspaper that similar houses in the area were selling for $1,300,000. The information relating to the 2018 basement rental is as follows: Rental income Furniture (purchased in January 2018) Advertising in their local newspaper New lock/keys for basement door $650 per month $2,500 $150 $50 A couple of weeks ago Ronda and Ronald had dinner with Kim and Ken, and Kim had mentioned how they had to report a partial disposition of their home for their 2016 taxes as a result of renting out their basement. Kim and Ken ended up paying tax that year on the partial disposition of their home since they own multiple vacation homes. This makes Ronda really nervous, as she and Ronald do not want to incur any more tax since they know their 2018 tax returns are already late for the second year in a row. Ronda is self-employed and earned a total of $120,000, after expenses in 2018. Ronald earned $90,000 of employment income in 2018. The couple does not have any other income or eligible deductions, other than the income (if any) from renting their basement apartment. The couple will file their 2018 taxes on their own, so there is no need to prepare their total 2018 tax liability; Ronda and Ronald are just waiting on us to provide 6 their total 2018 net rental income (if any), and for us to address whether there are any issues relating on changing part of their home from personal use to a rental apartment. Ronda and Ronald do not want to pay more in our fees, so there is no need to quantify the interest and late filing penalties in respect of their 2018 taxes- a brief summary to this effect is fine. Before walking out of the meeting, Ronald mentioned that they are likely going to sell their home by the year 2021. The couple does not own any other property and will purchase a condo once they sell this home. Ronald wants to ensure that he and Ronda can claim their principal residence exemption on their home in the year of sale. please answer according to Canadian tax