I’m working through a scenario involving a principal residence that was later converted to a rental with a valid subsection 45(2) election, and then sold several years later. My understanding is that because the 45(2) election prevents the deemed disposition that would normally occur at the change in use, the gain is not locked in at fair market value at the time of conversion. Instead, when the property is eventually sold, the reporting effectively falls back to the principal residence exemption calculation using Form T2091, where the gain is calculated from original purchase price to sale price and the exempt portion is determined based on years owned versus years designated as a principal residence (including the +1 rule).
In other words, while valuations and appraisals around the change-in-use date may be discussed during planning, the final tax calculation seems to rely on the SIMPLE year-based allocation under the principal residence formula rather than a stepped-up ACB based on those earlier values. Curious if others generally approach these files the same way in practice.
Thank you Tim. So in year of sale, we disregard any previous ACB or appraised value at time of 45(2) election, and default to the simple T2091 calc (in year of sale)?
Thanks Tim - the reason I’m in this group chat is actually to clarify my interpretation of section 45 and how it interacts with the principal residence exemption. My understanding is that section 45(1) addresses the deemed disposition when there is a change in use, while 45(2) allows that deemed disposition to be deferred if the election is filed. What I’m trying to confirm is how the capital gain should ultimately be allocated on the T2091 when the property is sold, given that some of the ownership years were principal residence years and others were rental years.
In my case, even though most of the property’s appreciation occurred during the rental years, the T2091 formula still results in only a relatively small taxable capital gain once the principal residence years are designated, because the calculation simply prorates the total gain based on years owned versus years designated. So my understanding is that I’m not using an ACB or appraisal from the change-in-use date, but instead relying entirely on the principal residence exemption formula (T2091) applied to the total gain at sale.
Report the deemed disposition of the principal residence 4 years after filing the 45(2) using the T2091, based on the FMV at that time. Years later, report the sale of the rental when the property actually sold, with ACB = that earlier FMV (the deemed disposition).
Report the sale of the property when actually sold, using the T2091, specifying the number of years it was principal residence vs total years owned. This eliminates the need for an appraisal on deemed disposition, but may or may not provide as much tax benefit as method 1.
Also note that the taxpayer can specify only one principal residence at a time, so if they keep the 45(2) active on the original property, they can’t claim those same 4 years on whatever new property they actually lived in.
@wachproperties ”In my case, even though most of the property’s appreciation occurred during the rental years, the T2091 formula still results in only a relatively small taxable capital gain once the principal residence years are designated,”
I would guess that whether you are looking at a T2091 correct or incorrect calculation result (per CRA) will probably depend on whether or not the entry for “principal residence years are designated” is correct or not.
CRA has decided that their administrative position (Folio S1-F3-C2, para 2.50) is that only up to 4 years post S45(2) election can be designated PR years.
It is my understanding that the election of deemed disposition itself is not limited to 4 years, and thus there would be no disposition until actually sold if that S45(2) election had been made.