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.
If you make this election:
- You have to report the net rental or business income you earn
- You cannot claim capital cost allowance (CCA) on the property
While your election is in effect, you can designate the property as your principal residence for up to 4 years, even if you do not use your property as your principal residence. However, during those years, you have to meet all of the following conditions:
- You can't designate any other property as your principal residence
- You are a resident or deemed to be a resident of Canada
You can extend the 4-year limit indefinitely if the reason for the change in use is that your or your spouse or common-law partner's place of employment has been relocated. To extend the 4-year limit, you have to meet all of the following conditions as well as continue to meet the conditions above:
- Your or your spouse 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 either:
- You are still with the same employer, or before the end of the year following the year in which this employment ends.
- You die during the term of employment.
- 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.
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.
If you make this election, you can designate the property as your principal residence for up to 4 years before you actually occupy it as your principal residence so long as:
- You haven't designated any other property as your principal residence.
- You are a resident or deemed to be a resident of Canada.
You can't make this election if Capital Cost Allowance (CCA) has been claimed on the property in any tax year after 1984 by either you, your spouse or common-law partner, or a trust in which you or your spouse or common-law partner is a beneficiary.
If you have any CCA claimed on the property in tax years before 1985, you have to include any recapture of CCA in the rental or business income for the year. Learn more.
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.
In the year you make the change in use, you won't have to report any capital gain on the part of the property that changed in use. When you actually sell the property, you will need to calculate the gain on the portion of the house that was not considered your principal residence.
The CRA will consider the entire property to be principal residence in spite of the fact that you have used it for income producing purposes when all of the following conditions are met:
- The income-producing use is ancillary to the main use of the property as a residence.
- There is no structural change to the property.
- There is no capital cost allowance is claimed on the property.
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.
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