Very often we are faced with a situation where a person moves temporarily from one city to another, a property becomes a rental unit or a rental unit becomes principal residence.
The question is: does a person have to occupy the property all the time for it to be deemed principal residence, and be it exempt from capital gain tax for the period the owner does not ordinarily occupy it?
There are certain elections one can make in order to defer the capital gain taxes when there is a change of use of the property from income producing to principal residence or from principal residence to income producing, AND certain requirements are met as stipulated by CRA.
Election 45(2): change of use - principal residence to a rental or business property.
For details regarding the election please visit the CRA 45(2) election page.
While your election is in effect, you can designate the property as your principal residence for up to 4 years, even if you do not use your property as your principal residence. However, during those years you have to meet all the following conditions:
- you do not designate any other property as your principal residence
- you are a resident or deemed to be a resident of Canada
- you have to report the net rental or business income you earn
- you cannot claim capital cost allowance (CCA) on the property
In certain circumstances you can extend the 4 years limit indefinitely, the details fulfilling these conditions are included in the link above.
A typical example would be: you own a condo which is your principal residence, you decide to move to a different city for a job or a travel, in the meantime you want to keep the condo and rent it out. You do not buy another property and the condo is still designated as a principal residence. The 45(2) election will be beneficial to you if the market value of the condo appreciates during that time.
Election 45(3): change of use - rental or business property to principal residence.
As the subheading suggests this is pretty much the opposite of the 45(2) election and there are number of conditions which have to be met to qualify, please visit CRA Folio page for details.
Below is an example provided by CRA illustrating the situation:
Mr. X bought a house in 2003 and rented it to a third party until mid-2009. Mr. X and his family then lived in the house until it was sold in 2011. Mr. X has been resident in Canada at all times. When he filed his 2011 income tax return, Mr. X designated the house as his principal residence for the 2009 to 2011 tax years inclusive, by virtue of his having ordinarily inhabited it during those years. He also designated the house as his principal residence for the 2005 to 2008 years inclusive (that is, the maximum 4 years) by virtue of a subsection 45(3) election, which he filed with his 2011 income tax return (he was able to make this designation because (i) no other property had been designated by him or a member of his family unit for those years, and (ii) he did not claim any CCA when reporting the net income from the property before the change in use). However, his gain otherwise determined on the disposition of the house in 2011 could not be fully eliminated by the principal residence exemption formula because he could not designate the house as his principal residence for the 2003 and 2004 years.
The above elections allow, in certain circumstances, to designate the property as a principal residence when the owner of the property does not ordinarily occupy the property during the year. Caution needs to be taken when deciding if the election should be filed and a tax professional should be retained for advice.
This article is intended for information purposes only, for tax advice specific to your situation please contact tax specialist.
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