Principal Residence Exemption When You Move for Work or Care, Canada

Moving out of a home you own is common. You may be transferred to another city, move into long-term care, or rent the house out for a while before deciding what to do. Each of these raises the same question: do you lose the principal residence exemption when you no longer live there?

Turning your home into a rental is generally treated as a sale at fair market value, but a subsection 45(2) election, or the exception for small partial changes in use, can let the home keep its status, so the steps you take on your tax return matter. This article walks through the general rules for absences and rentals. How they apply to a move into care or a particular relocation turns on the facts, so a lawyer or accountant should confirm your position.

This article covers Canadian federal tax law, which applies in every province.

The starting point: ordinarily inhabited

A principal residence must be a housing unit you own that was ordinarily inhabited in the year by you, your spouse or common-law partner, your former spouse or partner, or your child. Whether a unit is ordinarily inhabited is a question of fact. Even a short period of occupation in the year can be enough, but where the main reason for owning is to earn income, a brief stay generally will not qualify.

If nobody qualifying lives in the home in a year, because you moved out and it is rented or vacant, the property can still be treated as your principal residence for that year through an election under subsection 45(2) or 45(3). That rule is also relevant to a move into long-term care, though how it applies there turns on the facts.

What happens when a home becomes a rental

A change in use, such as from personal use to rental, is generally treated as a sale at fair market value followed by an immediate repurchase at the same amount, and that amount becomes the new cost base. For a partial change, the proportionate share of fair market value is used. A partial change in use where the rental or business use is relatively small can be an exception, with no deemed disposition at all.

With a subsection 45(2) election, there is no deemed disposition. You attach a signed letter to the return for the year of the change, describing the property and citing subsection 45(2). No capital cost allowance can be claimed on the property, and you may designate it as your principal residence for up to four years while it earns income, if you do not designate another property and remain a Canadian resident.

The four-year limit can be extended indefinitely in certain employer-relocation cases, including where the home is at least 40 km farther from the new workplace than your subsequent residence.

Common situations compared

Partial use, home offices and moving back

Renting part of your home does not automatically end the exemption. For a partial change in use 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 a business space and no CCA is claimed, the home can still be fully designated, but claiming CCA on that part can cost the exemption for that part.

If you move back in, a subsection 45(3) election postpones the deemed disposition until the actual sale. Written notice is due by the earlier of 90 days after a CRA demand and the filing-due date for the year of actual disposition, and it allows up to four prior years to be designated, but not if CCA was claimed. Where only part of a home earned income, selling price and cost base are split by square metres or number of rooms, if the split is reasonable.

What to do next

• Write down the date you moved out and who, if anyone, has lived in the home since
• Keep rental income and expense records, and note whether CCA was ever claimed
• Confirm you have not designated another property for your family unit for the same years
• Diarize the return for the year of the change, because the 45(2) letter goes with that return
• If you or a family member is moving into care, ask a lawyer or accountant how the rules apply to your facts

Timing matters for each election. The 45(2) letter goes with the return for the year of the change, while the 45(3) notice is due by the earlier of 90 days after a CRA demand and the filing-due date for the year of actual disposition.

Frequently asked questions