When you change the use of a property, whether changing your principal residence to a rental property or changing your rental property to a principal residence, you are deemed to dispose or “sale” the property at its fair market value and to have immediately reacquired the property for the same amount. Therefore, you might have to pay tax on any capital gain in the year the change of use occurs.
Changing All Your Principal Residence to a Rental Property
When you change your principal residence to a rental property, you trigger a deemed disposition or a “sale” of your property. The change in use might have result in a capital gain. You can make an election under subsection 45(2) of the Income Tax Act (ITA) that allows a deferral of the capital gain until the year in which the property is actually sold. However, you have to report the net rental income and you cannot claim capital cost allowance (CCA) on the property. In essence, this election deems the change in use not to have occurred and remains in effect until the election is rescinded.
To make this election, the taxpayer writes a letter indicating the property and state that you want subsection 45(2) of the ITA to apply and sending it to your Tax Centre prior to the due date of your income tax return.
Effective January 1, 2016, you are required to disclose (Original cost, address, selling price, etc.) the disposition of your principal residence on Schedule 3 of your personal tax return, T1, to Canada Revenue Agency (CRA).
Changing Your Rental Property to a Principal Residence
When you change your rental property to a principal residence, you trigger a deemed disposition or a “sale” of your property. The change in use might have result in a capital gain. You can make an election under subsection 45(3) of ITA that allows a deferral of the capital gain until the year in which the property is actually sold. This election can only be made if you have not claimed any CCA on the property.
To make this election, the taxpayer writes a letter indicating the property and state that you want subsection 45(3) of the ITA to apply and sending it to your Tax Centre prior to the due date of your income tax return.