- When you move out and rent your home, you are generally treated as having sold it at fair market value and bought it back at the same amount.
- A subsection 45(2) election can avoid that deemed sale and let you designate the home as your principal residence for up to four years, but you cannot claim CCA while it applies.
- You make the election by attaching a signed letter to your return for the year the use changes, and you report an eventual sale on Schedule 3 with Form T2091(IND).
Many Ontario homeowners move out for work or family reasons and decide to rent the home instead of selling it. That choice can change how the home is treated for tax, even though you still own it and have not sold anything.
This article explains the deemed sale that can happen when a property's use changes, how the subsection 45(2) election can avoid it, the special rules for employer relocations and for turning a rental back into your home, and what happens to your exemption when you finally sell. Your facts matter, so confirm the details with a lawyer or accountant.
Why renting your home can trigger a deemed sale
Every time you change the use of a property, you are treated as having sold it at fair market value and bought it back at the same amount. This applies, for example, when you move out of your home and rent it.
In plain terms, the tax system can treat the move as a sale even though no money changes hands. Without any election, that may create a gain to deal with for the year the use changes. Whether the home was your principal residence up to that point affects how much of that gain is exempt.
How the 45(2) election works
When you turn your principal residence into a rental, you can elect not to be treated as having changed its use. While the election is in effect, you can designate the home as your principal residence for up to four years.
There is a trade-off. You cannot claim capital cost allowance (CCA) on the property while the election applies. To make the election, you attach a signed letter to your income tax and benefit return for the year the change of use happens.
- Without the election: a deemed sale and repurchase at fair market value when the use changes.
- With the election: no change of use is recognized, and you can designate the home for up to four years.
- Either way, rental income is still reported on Form T776, with gross rents on line 8299.
Employer relocations and the section 54.1 extension
The four-year limit under a 45(2) election is removed when your employer relocates you. Among other conditions, the home must be at least 40 kilometres farther from the new workplace than your later residence, and the employer must not be related to you or your spouse or common-law partner.
The CRA requires all of its listed conditions to be met, and there are others beyond those two. If a job move is behind your decision to rent, review the full conditions with a lawyer or accountant before relying on this extension.
When a rental becomes your home again: subsection 45(3)
The reverse situation is when a rental becomes your home. You can elect to postpone reporting the deemed sale until you actually sell, and you can designate the home for up to four years before you move in.
The election is due by the earlier of 90 days after the CRA asks for it and your filing due date for the year you actually sell.
At sale: the exemption, reporting and late designations
If the property was solely your principal residence for every year you owned it, you usually pay no tax on the gain because of the principal residence exemption. If it was not, only part of the gain is exempt. The exempt part is the gain × (designated years + 1) ÷ years owned.
You report the sale and the designation on Schedule 3 (Capital Gains or Losses) and complete Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust). A family can designate only one home as its principal residence for each year for 1982 and later years.
The CRA will accept a late principal residence designation in certain circumstances, but a penalty may apply.
- Note the date you move out and the date rental starts.
- Decide before filing whether to make the 45(2) election.
- Keep records of the home's value when it changes use.
- Track the years you designate the home.
- Report the sale on Schedule 3 and file Form T2091(IND).
What to do next
Decide on the election before you file the return for the year you start renting, since the signed letter goes with that return. If you are moving for work, or plan to move back in later, ask a lawyer or accountant which election fits your situation and how the years will be counted.
If you own another home, such as a cottage, remember the one-home-per-family limit when planning which years to designate.
Frequently asked questions
Do I have to make the 45(2) election if I rent out my home?
No, it is an election you choose to make. Without it, the change of use is treated as a sale at fair market value and a repurchase at the same amount.
Can I claim CCA on a rented home if I make the election?
No. You cannot claim CCA on the property while the 45(2) election applies.
How long can I keep treating the home as my principal residence?
Under a 45(2) election, up to four years. That limit is removed when your employer relocates you, if the section 54.1 conditions are met, including the 40 kilometre test and the unrelated-employer rule.
What happens if you forget to designate the home when you sell?
The CRA will accept a late principal residence designation in certain circumstances, but a penalty may apply. Where a penalty applies to an accepted late, amended or revoked election, it is the lesser of $8,000 and $100 for each complete month from the original due date to the date of the request.
Sources
- CRA – Principal residence — canada.ca
- CRA Income Tax Folio S1-F3-C2 (¶2.20) — canada.ca
- CRA – Penalty for accepting a late, amended or revoked election — canada.ca
- CRA Guide T4036, Rental Income — canada.ca
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