- Every change in use of a property is treated as a sale at fair market value, so moving into your rental can trigger a deemed sale and reacquisition.
- Subsection 45(3) allows an election that avoids the deemed disposition when an income-producing property becomes your principal residence, and it has a written filing deadline.
- A deemed disposition must still be reported on Schedule 3 and Form T2091, even if no tax ends up payable.
- Depreciation (CCA) you claimed on the rental can come back as recapture, which is taxed as ordinary income rather than as a capital gain.
You bought a property, rented it out, and now you want to live in it. It feels like a simple move, but the tax rules treat the moment the property stops earning rent and starts being your home as an event in its own right.
This article explains in plain language what a change in use means, how the section 45(3) election fits in, and what a deemed sale can do to your capital gain. It is general information, not advice on your own numbers. A lawyer or accountant can confirm how it applies to you.
Why moving into your rental counts as a sale
Tax law treats every change in use of a property as a sale at fair market value. Converting a principal residence to a rental, or a rental to a principal residence, therefore triggers a deemed disposition and reacquisition at fair market value unless an election applies.
In plain words, the law pretends you sold the property on the day you moved in and bought it back for what it was worth that day. No money changes hands, but the paperwork and the gain calculation still matter.
- The deemed sale price is fair market value on the day the use changes.
- The same value becomes your new cost when the property is treated as reacquired.
- The change can be reported even though you did not actually sell.
The section 45(3) election
Subsection 45(3) of the Income Tax Act allows an election where an income-producing property becomes your principal residence. If you make it, the deemed disposition and reacquisition are avoided.
The election must be made in writing to the Minister on or before the earlier of two dates: the 90th day after the Minister demands it, and the filing-due date for the year of the actual disposition. That means the election can be tied to the year you eventually sell, not only the year you move in. Because the timing is specific, it is worth confirming your dates before relying on it.
There is a mirror-image election going the other way. Section 45(2) applies when a home becomes a rental, and it is covered in a separate article.
What a deemed sale can mean for your tax
A capital gain is the proceeds of disposition minus the adjusted cost base and the outlays and expenses of the sale. On a deemed sale, fair market value stands in for the proceeds. Generally, one-half of a capital gain is taxable.
If you claimed capital cost allowance (CCA) on the building while it was rented, there is a second issue. When the undepreciated capital cost of the class ends up negative, the excess is included in your income for the year. This is recapture, and it is taxed as ordinary income rather than as a capital gain.
| Piece | How it is generally treated |
|---|---|
| Gain on the deemed sale | Calculated as a capital gain; one-half is taxable |
| CCA claimed earlier | May be recaptured and added to income |
| Years the home was your principal residence | Can reduce the taxable gain under the exemption formula |
| Loss on a deemed sale of your own home | Cannot be claimed when it arises from a change in use |
The principal residence exemption formula reduces the gain by the proportion of years, after acquisition, that the property was your principal residence while you were a Canadian resident, with an extra year added in some cases. Years when the property was rented and not designated generally do not count toward that proportion, which is why the rental period matters.
If only part of the property changes use
Sometimes a property is only partly rented, for example a basement unit, and you later take it back. For a partial change in use, the CRA usually treats that part of the property as changed in use.
The exception is where the rental or business use is relatively small, there are no structural changes, and no CCA is claimed. In that case the selling price and adjusted cost base are split between the personal and income-producing parts, for example by square metres or number of rooms. Whether you fit the exception depends on the facts, so keep records of any renovations and of whether you claimed CCA.
Reporting, designation and late filing
Reporting the sale on Schedule 3 and Form T2091 is required even if the home was your principal residence for every year you owned it. It is also required for a deemed disposition such as a change in use.
On Schedule 3 you designate the property by ticking box 1 at line 17900 of Part 1. Form T2091(IND) is included with the return, and only page 1 is completed if the property was your principal residence for all years owned, or all but one. For 1982 and later years, only one home can be designated as the family's principal residence for each year.
Missing a filing has a cost. The penalty for a late-filed election or designation is the lesser of $8,000 and $100 for each complete month from the original due date to the date of the request. If a real estate disposition was never reported, the CRA may reassess beyond the normal reassessment period, limited to amounts related to that disposition.
What to do next
- Write down the date you stopped renting and the date you moved in.
- Gather the purchase documents, legal fees, and records of capital improvements.
- Find out whether you claimed CCA on the building in any year, and how much.
- Get a realistic fair market value for the move-in date, ideally with written support.
- Ask a lawyer or accountant whether a section 45(3) election suits your situation and confirm its deadline.
- Plan to file Schedule 3 and Form T2091 for the year of the change or the sale, as applicable.
Frequently asked questions
Do I owe tax just because I moved into my rental?
A change in use is treated as a sale at fair market value, so a deemed disposition can arise even though you did not sell. An election under subsection 45(3) can avoid that deemed disposition. Whether any tax is actually payable depends on your numbers.
Do I still need to file forms if the gain is covered by the principal residence exemption?
Yes. Reporting on Schedule 3 and Form T2091 is required even if the home was your principal residence for every year owned, and for a deemed disposition such as a change in use.
What if I missed the election or designation deadline?
A late-filed election or designation can carry a penalty of the lesser of $8,000 and $100 per complete month. The Minister may extend the time for an election if you apply within ten calendar years after the end of the relevant tax year.
Is the depreciation I claimed taxed differently from the gain?
Yes. A negative undepreciated capital cost in the class is recapture, included in income and taxed as ordinary income rather than as a capital gain. A lawyer or accountant can calculate it from your CCA schedule.
Sources
- CRA Guide T4036, Rental Income — canada.ca
- Income Tax Act, s. 13 — Justice Laws (federal)
- CRA, Principal residence — canada.ca
- Income Tax Act, s. 45 — Justice Laws (federal)
- CRA, Definitions for capital gains — canada.ca
- Income Tax Act, s. 38 — Justice Laws (federal)
- Income Tax Act, s. 40 — Justice Laws (federal)
- CRA, Reporting the sale of your principal residence for individuals — canada.ca
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