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Change in Use
Canadian Tax and
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Change in Use of a Residence
Happens if I Move into my Rental Property, or Start Renting out my Home?
Income Tax Act s. 45(1), 45(2), 45(3), 13(7)
When there is a change in use of real estate, either from
income-producing to personal-use (e.g., principal residence or
cottage/second home), or from personal-use to
income-producing, there is a deemed
owner is deemed to have disposed of the property (land and building), and to have
it, with both transactions done at fair market
How to Determine Fair
Market Value (FMV)
In order to determine the FMV upon a change in use, the taxpayer should get a
professional appraisal. If an appraisal isn't done at the time of change
in use, a professional appraiser can probably provide an appraisal for the date
of the change in use. From looking at Tax Court cases, it's obvious that
CRA does FMV appraisals long after the fact. We found no cases where the
taxpayer used something other than a professional appraisal, so cannot say if
assessment notices or sales of similar properties would be acceptable to
CRA. See also the special rules for determining FMV/new capital cost when
there is a change in use from personal use to
Change in Use
From Income-Producing to Personal-Use
When the property use changes completely or partially from income-producing
to personal use, the deemed disposition can result in a capital gain.
This is calculated by deducting the adjusted
cost base of the property from the fair
market value at the time of change in use. Where only a part of the
property has changed use (duplex, fourplex, basement suite, etc.), then there will be a deemed
disposition only for that portion of the property.
When there is a capital gain, under
certain circumstances the gain can be deferred by making an
election under subsection 45(3) of the Income Tax Act. The election may not be made if
allowance (CCA) has been claimed on the property for any taxation year ending after 1984. If any CCA was claimed
prior to 1985, this may result in a recapture of that CCA. To make
the election, a letter should be filed with the income tax return for the year in which
the property is eventually sold (or earlier if demanded by
CRA). Further information on this election can be
found in CRA Guide T4037
Use From Personal-Use
Note that if the property is not located in Canada, and the
new adjusted cost base is over $100,000 in Canadian dollars, there will be a
requirement to complete form T1135
foreign income verification statement each year in the future while the
property is owned.
Any gain resulting from this deemed disposition may be eliminated by the principal residence
exemption (PRE) if the property has always been the taxpayer's principal
residence. If the property has
been the principal residence for only a portion of the time it has been
owned, then the gain could still be partially eliminated by the principal
residence exemption. Starting with the 2016 taxation year, the
disposition will have to be reported on the taxpayer's income tax return
even if all of the gain is exempt due to the PRE. Check our article on
the principal residence
exemption re other changes announced in October 2016.
S. 45(2) Election - Defer Capital Gain Until Property
The taxpayer may also defer recognition of the resulting
capital gain (if any) by electing under subsection 45(2) of the Income Tax Act to be
deemed not to have made the change in use. This defers the recognition
of the capital gain until the property is ultimately sold. This
election cannot be made if there is only a partial
change in use of the property. The election should be made
when the change in use happens. Once this election has been
made, the property can still qualify as the taxpayer's principal residence for
up to 4 taxation years, even if the property is not inhabited during those
years by the taxpayer. However, the taxpayer must still be a resident or
deemed resident of Canada during those years in order to designate the
property as the principal residence. This can only be done if no other
property is designated as the principal residence for that same period.
Under current rules, a taxpayer cannot elect out of the
deemed disposition that arises on a change in use in part of a property.
The Federal 2019 Budget
includes a provision to allow an owner of a multi-unit residential property to
make use of the s. 45(2) or 45(3) elections.
For example, assume a taxpayer rented out their
principal residence on June 1, 2006, after living in it since 1996, and
moved into a friend or relative's home. The taxpayer filed a s.
45(2) election for the 2006 taxation year. The taxpayer sold the
former principal residence in 2012. No capital cost allowance was
claimed during the years 2006 to 2012 while the home was rented out.
If the election had not been filed:
There would have been a deemed disposition in 2006
at fair market value (FMV), with any gain sheltered by the PRE.
When the home was subsequently sold in 2012 there
would be a capital gain based on the increase in FMV since the deemed
Because the election was filed:
The change in use was deemed not to occur, so there
was no deemed disposal in 2006.
When the home was subsequently sold in 2012 there
would be a capital gain based on the increase in FMV since the home
was purchased in 1996. The number of years sheltered by the PRE
would be 11 (1996 to 2006 inclusive) plus 1 (normal rule for PRE) plus
4 (re s. 45(2) election), for a total of 16 years. The home was
owned for 17 years (1996 to 2012 inclusive), so the PRE would shelter
16/17ths of the total gain.
The property may qualify as the taxpayer's principal residence for more
than 4 taxation years (under certain
conditions) if the reason for the change in use is that the place of
employment of the taxpayer or the taxpayer's spouse or common-law
been relocated. The conditions (as per subsection 54.1 of the Income
Tax Act) include:
a. the employer must not be related to
the taxpayer or the taxpayer's spouse or common-law partner;
b. the property must be at least 40
kilometres farther from the new place of employment than is the subsequent
i. the taxpayer
resumes inhabitation of the property during the term of employment with the
same employer, or by the end of the taxation year following the year in
which the employment terminates; or
taxpayer dies during the term of the employment.
If the s. 45(2) election was not made when the change in
use occurred, CRA might accept a late election under certain circumstances,
one of which is that no capital cost allowance has been claimed on the
property since the change in use occurred and during the period in which the
election is to remain in force. For further information on late-filed
elections, see the CRA information Late, Amended or Revoked Elections.
What if I Rent Out
Part of My Home or Cottage, or Have a Home Office?
When you rent out a part of your home or cottage, or convert
part of your home to a home office, you are considered
to have changed the use of that part of the home from personal-use to rental property.
the circumstances, when you eventually sell your home, or
have a deemed disposition because you stop renting part of
it, you may have to report a capital gain on the portion of
your home that you rented out.
The CRA Rental
Income Tax Guide, T4036, and S1-F3-C2: Principal Residence
(see partial changes in use) state that if all of the following conditions
are met, you will not be considered to have a change in use:
- the part of the home used for rental
purposes is small in relation to the size of the whole
- you do not make any structural changes
to the property to make it more suitable for rental
- you do not claim any capital cost
allowance on the part you are using for rental purposes.
If all of the above conditions are met, you will not have
to report a capital gain when the property is sold or the
rental is stopped. Otherwise, you will have to report
a capital gain based on the portion of the house that was
If you rent out a part of your home, CRA's position is
that you may only write
off losses against other income if you have a
"reasonable expectation of profit" from the