What happens for tax in Canada if I convert my home to a rental property?
This answer covers Canadian federal tax law, which applies in every province.
Moving out and renting your home is a change in use, which is treated as a sale at fair market value followed by an immediate repurchase at the same amount, and that amount becomes your new cost base. For a partial change, the proportionate share of fair market value is used.
You can avoid that deemed sale by electing under subsection 45(2) that there be no deemed disposition, but no CCA can be claimed on the property, and the election is unavailable if CCA was claimed on it after 1984 and on or before the change in use. For a small rented room or home office, there is no deemed disposition if the rental or business use is relatively small, there are no structural changes and no CCA is claimed.
A deemed sale of a principal residence must still be reported on Schedule 3, even if the whole gain is exempt. How much of the gain is exempt depends on how many years you designate. Your accountant or lawyer can compare the options for your situation.
Key takeaways
- A change in use is a deemed sale at fair market value and an immediate repurchase at the same amount, which becomes your new cost base.
- A subsection 45(2) election can avoid the deemed disposition, but no CCA can be claimed on the property.
- A small partial rental or business use causes no deemed disposition if there are no structural changes and no CCA is claimed.
- A deemed sale of a principal residence must still be reported on Schedule 3, even if the whole gain is exempt.