I think no matter where in Ontario you are located your rules will differ. I have a Health Inspected kitchen in my home that I sell cakes from.
The most irritating thing is that each person is getting different info from their local Health Department.
My Health guy said that as soon as you advertise that you sell cakes from home the kitchen you use is now considered "commercial" and they have the right to inspect.
If you want to sell cakes from home your first stop should be to your local Health Department, ask what the regulations are and what you would need to do in order to comply with them. Once you have that info, it's a starting point. You will most likely need a separate kitchen, I know a girl who converted her upstairs laundry room into a separate kitchen and moved her laundry to the basement. It a good solution because there is already plumbing installed. It has a separate door and window. Others have built a separate kitchen in their basement, or retro fitted 1/2 their garage, all good solutions.
Once you have your regulations in hand you need to talk to your Municipality to see if your plan to renovate and add a separate kitchen is allowed. If it is you are off and running.
One piece of advice is to talk directly to an inspector at your local Health Dept. not the person who answers the telephone, they will give you wrong info pretty much every time. My Health guy is the one who regulates and inspects the entertainment industry. Catering, Tattoo Parlor's, and me home based food business.
I also recommend all of you who sell cakes to take the "Safe Food Handling Course" offered through your local Health Dept. It's only about $40.00 and once you have it, it's valid for 5 years. I have mine. Just say you are taking the class for yourself, they will ask what company you work for, don't get into it, you are taking it for yourself. The course is open to everyone.
I wish you all success in your cake venture. Don't give up when you run into someone unhelpful or adamant that it isn't possible. If you don't like the answers given to you from one inspector, talk to another one.