- Changing your home to a rental is generally treated as a sale and immediate repurchase at fair market value.
- A subsection 45(2) election can avoid that deemed sale, and lets you designate the home as your principal residence for up to four years while it earns income, if conditions are met.
- The election is lost if capital cost allowance was claimed on the property, so the choice to claim it matters.
If you are moving out of your home and plan to rent it, the Canada Revenue Agency (CRA) treats the change as a tax event, even though you have not actually sold anything. Many owners do not learn this until a tax return is due.
This article explains the deemed disposition that happens on a change in use, how a subsection 45(2) election can postpone it, where the limits are, and how the election is filed. Your facts may change the result, so a lawyer or accountant can confirm how this applies to you.
This article covers Canadian federal tax law, which applies in every province.
What happens when your home becomes a rental
A change in use, such as a home becoming a rental, is a deemed disposition at fair market value, followed by an immediate reacquisition at the same amount. That amount becomes the new cost base of the property.
For a partial change in use, the proportionate share of fair market value is used. Because the home is deemed sold, a gain could arise even though you never received any money. Whether that gain is sheltered usually depends on the principal residence exemption, which in turn depends on your designation of the home.
How the 45(2) election works
On a change from personal use to income-producing use, you can elect under subsection 45(2) that there be no deemed disposition. The sale is then postponed until you actually sell or otherwise dispose of the property.
- No capital cost allowance (CCA) can be claimed on the property.
- You may designate the home as your principal residence for up to four years while it earns income.
- You must not designate another property for those years, and you must remain a Canadian resident.
Limits and exceptions to watch
The election is not available if CCA was claimed on the property after 1984 and on or before the change in use, whether by you, your spouse or common-law partner, or a trust of which either is a beneficiary.
The four-year limit can be extended indefinitely under section 54.1 in certain employer-relocation cases, including where the home is at least 40 km farther from the new workplace than your subsequent residence.
Only one property per family unit can be designated as a principal residence for each year from 1982 onward. If you buy a new home and designate it, you generally cannot also use the 45(2) years on the old one for the same years. A spouse or common-law partner who was separated for the whole year under a court order or written separation agreement is not in the same family unit for that year.
Partial rental use and home offices
Not every rental use ends the exemption. For a partial change in use, such as a 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. Since 19 March 2019, a 45(2) or 45(3) election is also available for a partial change in use.
If part of the home is used for business and no CCA is claimed on it, the home can still be fully designated. Claiming CCA on the business part can cost the exemption for that part. If only part of the home is the principal residence, the selling price and cost base are split by square metres or number of rooms, if the split is reasonable.
How to file and what to do next
To make the election, attach a signed letter to your return for the year of the change. It should describe the property and cite subsection 45(2). When you eventually sell, report the sale on Schedule 3 and designate the home there, since CRA allows the exemption only if the disposition and designation are reported. Use Form T2091(IND) to designate the property and calculate any gain.
- Decide before you move out whether you will claim CCA, since claiming it can rule out the election.
- Note the date the use changes and keep records of the home's value around that time.
- Attach the signed 45(2) letter to the return for the year of the change.
- Avoid designating another home for the same years.
- Keep records of improvements and selling costs for the eventual sale.
- Speak with a lawyer or accountant if you are moving abroad, since residency affects the election.
Frequently asked questions
Do I owe tax when I start renting out my home?
A change in use is generally a deemed sale at fair market value. A 45(2) election can avoid the deemed disposition. Whether tax is owed depends on your facts and any principal residence designation.
How long can I keep the principal residence status while renting?
With a 45(2) election, you may designate the home for up to four years while it earns income, if you designate no other property and remain a Canadian resident. Certain employer-relocation cases can extend this period.
Can I claim CCA on my rental and still use the election?
No. No CCA can be claimed on the property under the election, and the election is unavailable if CCA was claimed after 1984 and on or before the change in use.
What if I move back in later?
A change from rental or business use back to a residence has its own election under subsection 45(3), which postpones the deemed disposition until the actual sale. It does not allow prior years to be designated if CCA was claimed. A lawyer or accountant can confirm the details.
Sources
- CRA – Principal residence (line 12700) — canada.ca
- CRA – Income Tax Folio S1-F3-C2 — canada.ca
- Income Tax Act, s. 45 — Justice Laws (federal)
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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