Subsection 45(2) Election in Canada: Change in Use Tax Bill

You have moved out of your home and plan to rent it, but you would rather not trigger a tax bill on a sale you never made. The Income Tax Act has an election aimed at exactly this situation.

This article explains what a change in use does, how to file the subsection 45(2) election, how long it lasts, and the situations in which it is not available.

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

What a change in use does

When a property changes from personal use to income-producing use, the law treats you as having sold it at fair market value and immediately bought it back at the same amount, and that amount becomes your new cost base. For a partial change, the proportionate share of fair market value is used.

A deemed sale can produce a capital gain even though no money changed hands. Half of a capital gain is taxable. A principal residence designation can shelter some or all of that gain, but the exemption depends on the years the home qualifies and the other rules in the Income Tax Act. The election is a way to avoid the deemed sale in the first place.

How to make the election

Under subsection 45(2), you can elect that there be no deemed sale on a change from personal use to income-producing use. You attach a signed letter to your return for the year of the change, describing the property and citing subsection 45(2).

• Confirm the year the property began earning income.
• Write a letter that describes the property and cites subsection 45(2).
• Sign the letter.
• Attach it to the return for the year of the change.
• Keep a copy with your records of the home's purchase and improvements.

For a partial change in use, such as renting part of your home, the election has been available since 19 March 2019. A small rental or business use with no structural changes and no CCA may not trigger a deemed sale at all.

How long the election lasts

While the election is in place, you may designate the property 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.

There is an exception. 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 the new workplace than your subsequent residence.

Because only one property per family unit can be designated for each year from 1982 onward, a second home you designate for the same years can interfere. If you and your spouse own two homes, you may split years between them as long as no year is designated for two properties.

When the election is not available

• You claimed capital cost allowance: 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, by you, your spouse or common-law partner, or a trust of which either is a beneficiary.
• You want to claim CCA going forward: no CCA can be claimed on the property while the election is in effect.
• You designate another home: the designation works only if you do not designate another property.
• You stop being a Canadian resident: the designation requires that you remain a Canadian resident.

If the property later goes back from rental to personal use, a related election exists under subsection 45(3). It postpones the deemed sale until the actual sale, and notice in writing is due by the earlier of 90 days after a CRA demand and the filing-due date for the year of the actual sale. It allows up to four prior years to be designated, but not if CCA was claimed.

What to do next

Decide before you file for the year you start renting. The letter goes with that year's return, so it is easiest to handle when you prepare the return rather than years later. If you are unsure whether your situation fits, a lawyer or accountant can review it.

• Check whether CCA has ever been claimed on the property.
• Decide whether you will designate another home for the same years.
• Prepare the signed letter and attach it to the return for the year of the change.
• When you eventually sell, report the sale on Schedule 3 and complete Form T2091(IND).
• Keep your records of the dates of occupancy, rental and any later return to personal use.

Reporting the sale is required even if the gain is fully exempt, and CRA allows the exemption only if the sale and designation are reported.

Frequently asked questions