^^^
No, you do not automatically lose your principle residence status if you're claiming business use of home expenses.
As long as the primary purpose of your home is for living in and not for your business, you should be good. I believe the tax regs state that the business must be an "ancillary" purpose, so if people are claiming more than half of the principle residence for business use then you're liable for capital gains tax. Another rule to avoid capital gains is that you can't make structural changes to your home to accommodate the business - ie putting in an outside entrance just for the business. However, if you do cross one of those two thresholds and lose your principle residence status, you only pay capital gains tax on the part of the home that you use for business, not the entire home. The one thing that for sure is a no no is claiming capital cost allowances on your home, that will result in losing the principle residence status for the home.
Say you're using 30% of the home for a biz AND you make structural changes to accommodate the biz, you would pay capital gains tax only on the portion of the home used for the biz. For example, if your home goes up $200K in value, the 30% of the home that is being used for the biz is subject to capital gains tax - you'd be assessed for $60K. You would then pay capital gains tax (25%) on that $60K, NOT the whole $200K, and would owe $18K. Importantly, don't forget that the capital gains is only paid if/when you sell the home. Consider that $18K of tax in my example; if you amortize that over the length of time you had been in the house, say 10yrs, the yearly cost would be $1800. Depending on your monthly business use of home expenses (30% of mtg interest, hydro/gas, utilities, pptty tax from my example) that $1800 could be much less than your yearly expenses, making the deductions very worth it. So yes, you could have to pay capital gains, but it's only on the portion of the home used for the biz and only if it's meets one of the criteria mentioned before; the biz occupying more than 50% of the floor area of the home or if you make structural changes to accommodate the business - like putting in a separate entrance just for the biz.
I agree I did simplify things somewhat, but in my example I was very clear you don't write off the entire mortgage, only the part you use for the biz. I also stated that the business needs to legitimate and "shows reasonable income/expenses and is not perennially running a loss". Later on in the conversation I also said that "it's wise to get professional advice if one is unsure of how the rules may apply to their particular situation." It's not like I said just open an etsy store and start writing off your mortgage - that's being disingenuous.
It might be worth revisiting things in your situation Kenny just to see of you are leaving any money on the table by not claiming business use of home expenses.
ps - IME insurance implications are related to the percentage of the home used for the business and the nature of the business. Your home insurance may need to be increased to cover any special equipment or inventory you store in the home if you have one policy that covers everything ,or you may want to get a separate policy or rider just for the business. You might also need extra insurance in the form of liability if your business involves personal services such as massage or physio. It all depends on the nature of the biz, how much insurance you need, etc, which is something you can figure our with your insurance broker.