What happens for tax purposes if I convert my home to a rental property?

When you stop using your home as your principal residence and start renting it out, the federal Income Tax Act treats this as a "change of use." At the moment of the change, you are deemed to have disposed of and immediately reacquired the property at its current fair market value. Any capital gain accrued while it was your home can be sheltered by the principal residence exemption, while any future gain after the change of use is taxable.

There is an important election available under section 45(2) of the Income Tax Act that allows you to defer this deemed disposition and continue to treat the property as your principal residence for up to four additional years after the change of use — even if you are not living there — provided you do not claim CCA during those years and do not designate another property as your principal residence during the same period. This election can preserve significant tax savings if you plan to move back.

The reverse applies if you convert a rental property to your personal home — a deemed disposition occurs at fair market value on the date of conversion, and the accrued gain is taxable at that time.