Principal Residence Exemption on a Rented Home in Canada

Many people live in a home for years, move for work or family reasons, and rent the old place out instead of selling. Later, when they do sell, they wonder whether the rental period cost them the principal residence exemption.

Renting does not automatically end the exemption, but it does change how the rules apply. This article walks through what happens when you rent out the whole home, when you rent only part, and which years can still be covered.

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

Does renting kill the exemption?

Not automatically. A principal residence is a housing unit you own that is ordinarily inhabited in the year by you, your spouse or common-law partner, a former spouse or partner, or your child. The years you actually lived there can generally be designated. The question is what happens in the years when someone else lived there.

A change in use, such as moving from personal use to renting, is treated as a sale at fair market value and an immediate repurchase at the same amount, which becomes your new cost base. For a partial change, the proportionate share of fair market value is used. That deemed sale is the main tax risk of renting out a home.

Renting out the whole home: your options

You can elect under subsection 45(2) that there be no deemed sale when the home changes from personal use to income-producing use. You attach a signed letter to the return for the year of the change, describing the property and citing subsection 45(2). While the election is in place, 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 you remain a Canadian resident.

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 your new workplace than your subsequent residence.

Renting only part of the home

If you rent a room or use part of the home for business, the exemption can survive. For a partial change in use there is no deemed sale 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.

With a home office, if no CCA is claimed on the business part, the home can still be fully designated, and expenses other than CCA may be claimed subject to the folio's conditions. Claiming CCA on the business part can cost you the exemption for that part.

Where only part of a home is the principal residence and the rest earned income, the selling price and adjusted cost base are split by square metres or number of rooms, if the split is reasonable.

Traps that can cost you the exemption

• Claiming CCA: the 45(2) and 45(3) elections are not available if CCA was claimed on the property after 1984 and on or before the change in use.
• Designating another property: the 45(2) designation works only if you do not designate another property for those years. Only one property per family unit can be designated for each year from 1982 onward.
• Leaving Canada: the designation under the election requires that you remain a Canadian resident.
• Buying and selling quickly: a gain on a housing unit owned less than 365 consecutive days before sale is deemed business income, and the exemption does not apply, for dispositions after 2022. There are listed exceptions, such as death, serious illness, a relationship breakdown, or an eligible relocation.

Whether a rental period is short enough to leave the exemption intact depends on the facts, so it is worth a conversation with a lawyer or accountant before you sell.

What to do next

• Write down the dates you lived in the home and the dates it was rented.
• Check whether CCA was ever claimed on the property.
• Find out whether a subsection 45(2) letter was filed for the year you started renting.
• Get a record of the home's value at the time you began renting.
• Report the eventual sale on Schedule 3 and designate the property on Form T2091(IND).
• Ask a lawyer or accountant about any year that is not covered.

If you forget to designate in the year of sale, ask CRA to amend the return for that year. A late designation may be accepted in certain circumstances, but a penalty may apply.

Frequently asked questions