Principal Residence Change of Use

Key Takeaways

If a taxpayer begins using their principal residence for an income-earning purposes, the Income Tax Act allows the taxpayer to elect out of being deemed to have disposed of the property.

The deemed disposition of the principal residence upon election to designate the property as a rental property can be delayed up to 4 years.

To defer deemed disposition of your principal residence up to 4 years you must be a resident of Canada, and you have not designated another property as your principal residence.

When you convert your primary residence into an income-generating property, such as a rental or commercial property, you have the option to elect not to be deemed as having begun using your principal residence for rental or business purposes. As a result, you will not be required to report any capital gains when you change its use. However, if you make this election, you will not be able to claim capital cost allowance (CCA) on the property.

This election can be made by attaching a letter to your income tax return for the year the change took effect and mailing it to the CRA. In your letter you should describe the property and state that you want subsection 45(2) of the Income Tax Act to apply. You may also EFILE your return and send the letter separately by mail. It is important to follow up with the CRA to make sure they have received and processed the letter.

While the election is in effect, the property can still be designated as the principal residence, even if you do not reside at the property. However, you must meet all of the following conditions during those years:

You are a resident or deemed to be a resident of Canada; and

You have not designated another property as your principal residence.

To extend the 4-year deferment indefinitely, you must meet all of the following conditions in addition to the previously mentioned criteria (source: Canada.ca):

You live away from your principal residence because your employer, or your spouse's or common-law partner's employer wants you to relocate;

You and your spouse or common-law partner are not related to the employer;

You return to your original home while you or your spouse or common-law partner are still with the same employer, or before the end of the year following the year in which this employment ends, or you die during the term of employment; and

Your original home is at least 40 kilometres (by the shortest public route) farther than your temporary residence from your, or your spouse's or common-law partner's, new place of employment.

If a taxpayer has changed the use of a property from income producing (e.g., rental property) to a principal residence, subsection 45(3) provides an election to avoid the deemed disposition on the change in use. This allows the taxpayer to defer the capital gains accrued while the property was rented out until it is ultimately disposed of. The 45(3) election can allow the taxpayer to look back four years when designating a property as their principal residence. It is important to note that the 45(3) election is only available if no capital cost allowance (CCA) is claimed on the rental property. Once the election is made, it remains in effect until it is revoked by the taxpayer.

If you made the election to designate your principal residence as a rental or a commercial property and at the end of the 4-year deferment limit you decided to move back to your residence, there will be no immediate effect on your income tax situation. The election to redesignate the property as your principal residence can be made by attaching a letter to your income tax return for the year the change took effect and mailing it to the CRA. If you decided to change the use of the property again without making this election, any gain from selling the property may be subject to tax.

For further information please contact Taxtron Support at 416-491-0333 or visit www.taxtron.ca