Renting Out Your Ontario Home: Change of Use and the 45(2) Election

Plenty of Ontario homeowners move out for work, family or a new home and decide to rent out the old one instead of selling. It feels like nothing has changed on paper, but for tax purposes the day you start renting can be a significant event.

This article walks through how a change of use works, how the subsection 45(2) election can soften it, what happens when a rental becomes your home again, and what you report when you eventually sell. Your facts matter a great deal here, so treat this as a map and not a substitute for advice.

What a change of use means for tax

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.

That deemed sale can matter because a home that stops being your principal residence may no longer be fully sheltered. Whether any tax actually arises depends on the home's value, what you paid, and how many years it counts as your principal residence.

A home qualifies as your principal residence for a year only if it meets all of the conditions: it is a housing unit, you own it alone or jointly, you or certain family members lived in it at some time during the year, and you designate it.

The subsection 45(2) election

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. Keep a copy of the letter and note the date the rental began.

• Without the election, the deemed sale at fair market value applies.
• With the election, you can designate the home for up to four years.
• With the election, you cannot claim CCA.

Employer relocation and moving back in

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. All of the conditions must be met, so this is worth confirming against your facts.

If a rental becomes your home again, a subsection 45(3) election lets you 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 45(3) 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. Do not leave it to chance if you are planning a move back.

Renting only part of your home

If you use only part of the home to earn income, you split the selling price and adjusted cost base between the two uses on a reasonable basis, such as square metres or number of rooms. Only the gain on the income-producing part is reported, on line 13800 of Schedule 3.

There is a narrower case. The CRA generally keeps full principal residence treatment where the income-producing use is ancillary to the home's main use as a residence, there is no structural change, and no CCA is claimed.

Which case you fall into depends on how much of the home is rented, how it is set up, and whether you claimed CCA, so it is worth confirming with a lawyer or accountant before you rely on either.

The exemption formula and reporting a later sale

If the home was solely your principal residence for every year you owned it, you usually pay no tax on the gain. If it was not, only part of the gain is exempt. The exempt part is the gain × (designated years + 1) ÷ years owned. The CRA's example is $50,000 × (8 ÷ 10) = $40,000 exempt.

On a sale, you report the sale and the designation on Schedule 3 and complete Form T2091(IND). For 2025, the capital gains inclusion rate is 50%, so half of a capital gain is taxable. Check the current year's rate if you sell later.

While you rent the home, you file Form T776. Gross rents go on line 8299, and the net amount from line 9946 goes on line 12600 of your return. Joint owners each report their share according to their ownership share.

What to do next

• Write down the date you moved out and the date the rental began.
• Get a record of the home's fair market value at the time of the change.
• If you want to make the change-of-use election, attach a signed letter to your income tax and benefit return for the year the change of use happens.
• Keep your CCA position in mind, since claiming it is not allowed under the election.
• Track rent and expenses for Form T776 each year.
• If you missed a designation, ask about a late filing. The CRA will accept a late designation in certain circumstances, but a penalty may apply.

Whether a penalty would apply to a late designation in your situation, and how much it would be, depends on the facts. A lawyer or accountant can confirm this before you move out or sell.

Frequently asked questions