Every time you change the way you use a property, you are considered to have a deemed disposition. This means you sold the property at its fair market value and to have immediately reacquired the property for the same amount. The deemed disposition may result in a capital gain.
If the property was your principal residence for any year you owned it before its change in use, you do not have to pay tax on any gain that relates to those years. You only have to report the gain that relates to the years your home was not your principal residence. Learn more
In certain situations, the change in use rules do not apply:
Changing all your principal residence to a rental or business property
When you change your principal residence to an income producing property you can file an election 45(2) which means that you do not have to report any capital gain in the year you change the property’s use. Instead, you defer the capital gain calculated (and any tax you would have to pay on it) until the property is sold.
Changing all your rental or business property to a principal residence
When you change a rental or business property to your principal residence, you can file an election 45(3) to defer recognition of the gain until you actually sell the property.
Changing part of your principal residence to a rental or business property or vice versa
If you change the way you use only part of your property, and that change is substantial and of a more permanent nature, you will have a deemed disposition of only the part that has changed.
Making an election
To make an election, add the section File an Election and check the box indicating that you are filing an election. Prepare a letter that includes the following:
- your full name, address, and social insurance number (SIN) and signature.
- Indicate the year in which the change of use occurs, describe the property and state that you want subsection 45(2) or 45(3) of the Income Tax Act to apply (whichever is applicable).
If you are submitting your return via NETFILE, you will need to send the CRA the letter in support of the election to your tax centre. If you are sending your return by mail, attach it to your return.