- Under the Income Tax Act, your tax position in a property is tied to how you use it.
- The Income Tax Act includes an election that lets qualifying taxpayers defer the deemed disposition when they convert a property between personal and rental use.
- Many landlords claim CCA each year to reduce rental income — it is a legitimate deduction.
Buying a rental property and later deciding to move in — or moving out of your family home and renting it while you take a job in another city — seems straightforward. But under the Income Tax Act, shifting how you use a property triggers rules that most Ontario homeowners do not see coming until they sell. The change-of-use rules for rental property and principal residence status can mean an unexpected tax bill, or, if you plan ahead, a legal way to defer and reduce that bill significantly.
This article explains what happens at the moment of change-of-use, what the available election does, when recapture of capital cost allowance becomes a problem, and how two common Ontario scenarios play out. Read it as a starting point — then talk to a tax lawyer or accountant about your specific numbers, because the rules have details that can shift from year to year.
What Is a "Change of Use" and Why Does It Matter?
Under the Income Tax Act, your tax position in a property is tied to how you use it. When you convert a property from income-producing (rental) to personal use (your home), or the reverse, the Act treats you as though you sold the property at its fair market value on the date of the change — even though no money actually changes hands. This is called a deemed disposition.
The deemed disposition has two possible consequences:
- A capital gain or loss. If the property has gone up in value since you acquired it (or since the last change of use), that gain becomes taxable. Canada taxes a portion of capital gains as income — the exact inclusion rate can change with federal budgets, so confirm the current rate with the CRA or an accountant before doing any planning.
- Recapture of capital cost allowance (CCA). If you claimed CCA (depreciation) on the property while it was a rental, the deemed disposition can trigger recapture — meaning that claimed depreciation gets added back to your income in the year of change. Recapture is taxed as ordinary income, not a capital gain, so the rate is typically higher.
Immediately after the deemed disposition, the Act also treats you as re-acquiring the property at fair market value. That new cost base matters when you eventually sell.
The Election: Deferring the Deemed Disposition
The Income Tax Act includes an election that lets qualifying taxpayers defer the deemed disposition when they convert a property between personal and rental use. In plain language, the election allows you to keep treating the property as your principal residence — and avoid triggering the taxable deemed disposition — for a period of time after the change of use.
Key points about the election, with the caveat that you should verify all details against current CRA guidance:
- Direction it applies. The election is most commonly used when a property moves from rental to personal use (you move into a former rental), but there is also an election available when you move out of your home and start renting it.
- Time limit. The election to maintain principal residence status after you move out of your home and begin renting it allows you to designate the property as your principal residence for a limited number of years — historically up to four years — even while you are not living there. Confirm the current maximum with the CRA, as legislative changes can affect it.
- You cannot designate another property as your principal residence for the same years. If you own a cottage or a second home, using the election for the rented property means you cannot shelter gains on the other property for those same calendar years.
- No CCA while the election is in place. If you claim CCA on the property during the years covered by the election, you lose the election for that period. This is a critical planning point — once you claim CCA, you cannot go back.
- How to file. The election is made by attaching a signed letter to your income tax return for the year the change of use occurs. The CRA has published guidance on the required content of that letter. Missing the deadline or the filing requirement can mean losing the election entirely.
Recapture: The Cost of Claiming CCA
Many landlords claim CCA each year to reduce rental income — it is a legitimate deduction. But CCA claimed on a property creates a "recapture trap" if the property's value has held or increased by the time you change its use or sell it.
When a deemed disposition occurs (or when you sell), any CCA you have claimed gets recaptured as income to the extent the proceeds or fair market value exceed the property's depreciated cost. Because recapture is fully included in income (unlike capital gains, which have a partial inclusion), claiming CCA during a rental period and then moving in can be more expensive than it initially appeared.
The practical takeaway: if there is any realistic chance you will one day move into a rental property, or that it will appreciate significantly, talk to an accountant before claiming CCA. The short-term tax savings may cost more on the back end.
Scenario A: You Buy a Rental Property and Later Move In
Imagine you purchase a condominium in Mississauga as a long-term rental. Several years later, you decide to move in and make it your primary residence.
On the day you move in, the Income Tax Act deems you to have sold the condo at its current fair market value and immediately reacquired it at that same value. If the condo has appreciated since you bought it, there is a capital gain based on the increase from your original cost (minus any improvements) to the fair market value on move-in day. That gain is reportable in the year of the change.
If you did not claim CCA during the rental years, you avoid recapture. Going forward, the property's adjusted cost base for future sale purposes is the fair market value at the time you moved in — which is helpful if it continues to appreciate.
Once you are living there as your primary home, you can begin designating it as your principal residence to shelter future gains, subject to the normal principal residence exemption rules.
Scenario B: You Move Out of Your Home and Rent It During a Work Relocation
Ontario professionals sometimes accept a temporary role in another city or country. Rather than selling their Mississauga or Toronto home, they rent it out and intend to move back in.
Here, the change-of-use rules work in the opposite direction: the day you move out and the property becomes a rental, there is a deemed disposition at fair market value. Any gain accrued up to that point while it was your principal residence would normally be sheltered by the principal residence exemption. The problem arises for gains that accrue while you are away.
This is exactly the situation the election is designed for. By filing the election, you can continue to designate the property as your principal residence for the covered years — up to the current maximum — even while you are renting it out and living elsewhere. During those years, gains continue to be sheltered as though you still live there.
The trade-off: you cannot claim CCA during those years (or you lose the election), and you cannot designate another home as your principal residence for the same years. If the relocation turns permanent, you will eventually lose the election's protection, and gains from that point forward will be taxable.
Frequently asked questions
What CRA form do I file to make the election?
There is no standalone CRA form specifically for this election. You make it by attaching a written election letter to your income tax return for the year the change of use occurs. The CRA's guidance sets out what the letter must contain. Because missing a filing requirement can invalidate the election, working with a tax professional in the year of the change — not later — is strongly advisable.
If I move back in before the election period expires, am I fine?
Moving back in before the election period expires is generally the cleanest outcome — the property resumes full principal residence status from that point. However, any years the property was rented and not covered by the election (for example, if you rented it for longer than the election allows) may produce a taxable gain on eventual sale, prorated over the period of ownership. The exact calculation depends on the years designated and the total ownership period.
Does the election help if property values dropped?
If the property's fair market value on the date of change-of-use is lower than what you paid, there may actually be a capital loss on the deemed disposition (rules on claiming that loss against other gains are complex). In a declining market, the election may be less critical from a tax perspective — but the CCA recapture issue can still arise independently if depreciation was claimed. Confirm the interaction of these rules with an accountant.
I own a cottage too. Can I use the election and also shelter the cottage?
You can only designate one property as your principal residence for any given calendar year. Using the election to maintain principal residence status for the rented-out family home during those years means those years cannot be used to shelter gains on the cottage. If both properties have appreciated significantly, your accountant may help you model which designation produces the lower overall tax cost.
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