Renting Out Your Whole Home in Canada: The Subsection 45(2) Election

You have moved out of your home and decided to rent it rather than sell it. That feels like a small change, but for tax purposes it can be a significant one, because the home has stopped being used only for personal purposes.

This article explains in plain terms what happens when you rent out your whole home, how the subsection 45(2) election can protect your principal residence exemption, and what to watch for. Your facts matter, so a lawyer or accountant can confirm how this applies to you.

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

What a change in use does

A change in use, such as a home becoming a rental, is a deemed disposition at fair market value, followed by an immediate reacquisition at the same amount. That amount becomes your new cost base.

For a partial change, the proportionate share of fair market value is used. In plain words, the law pretends you sold the home and bought it back on the day you started renting, even though no money changed hands.

How the subsection 45(2) election works

On a change from personal use to income-producing use, you can elect that there be 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).

While the election is in place, you may designate the home as your principal residence for up to four years while it earns income. Three conditions apply:

• No capital cost allowance (CCA) can be claimed on the property.
• You must not designate another property as your principal residence for those years.
• You must remain a Canadian resident.

When the election is not available or can be extended

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. This covers claims by you, your spouse or common-law partner, or a trust of which either is a beneficiary.

The four-year limit can be extended indefinitely under section 54.1 in certain employer-relocation cases. One example is where the home is at least 40 km farther from the new workplace than your subsequent residence.

Moving back in, and filing late

The reverse election is under subsection 45(3), for a change from rental or business use back to residence. It 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. It allows up to four prior years to be designated, but not if CCA was claimed.

If you forget to designate in the year of sale, ask CRA to amend the return for that year. CRA may accept a late designation in certain circumstances under ITA s. 220(3.2), but a penalty may apply. The Minister may extend the time if the request is made within ten calendar years after the tax year ends.

The late-election penalty is the lesser of $8,000 and $100 multiplied by the number of complete months between the due date and the date of the application. The Minister may also waive or cancel penalties or interest if the request is made within ten calendar years after the tax year ends.

What to do next

When you eventually sell, the sale must be reported on Schedule 3 of your T1 return, even if the whole gain is exempt. CRA allows the exemption only if the disposition and designation are reported. You calculate any gain and make the designation on Form T2091(IND).

• Decide before or when you start renting whether you will make the election, and confirm that no CCA has been claimed on the home.
• Write and sign the letter, describe the property and cite subsection 45(2), then attach it to the return for the year of the change.
• Keep track of how many years the home has been rented, since the designation is limited to four years unless an extension applies.
• Do not designate another home for the same years.
• Report the sale on Schedule 3 and complete Form T2091(IND).
• Speak with a lawyer or accountant if you are unsure about CCA, relocation, or a missed designation.

Frequently asked questions