Taxpayer wants to start renting out her cottage for 5-7 weeks a year (if she can find any takers). The rest of the year the property will be vacant and available for her personal use. Until now, it has always only been a personal use property.
Should she file a 45(2) to avoid the change in use, but not claim the cottage as principal residence? Or is a 10%-13% business use considered ancillary to the main use and not triggering a deemed disposition?
I can’t find anything saying this treatment applies to all personal use property … I can only find references for a principal residence. So, I’m thinking of filing the 45(2) just in case. Any harm in that? I would love to know what y’all think.
No reason to file a 45(2) if it isn’t a principal residence. 45(2) just extends the number of years you can designate it AS a principal residence.
If the cottage isn’t her principal residence then she will have to pay tax on any capital gains, regardless of any rental income.
The concern is if there is a deemed disposition because of a change in use from personal use to rental property, then the capital gain tax becomes payable now as opposed to when the property is actually sold. The reason for the 45(2) was not to claim it as principal residence. Rather it would be to not have the change in use take effect. I was under the impression you could file the 45(2) so the deemed disposition is not considered to have taken place, but you didn’t have to claim the property as a principal residence.
Hmm. You could be right. I haven’t read through the complete text of subsection of 45(2) in a long time. I’ve only ever seen it used with respect to a principal residence. I don’t have time to look it up, though. I suggest you read through it yourself. Let us know what you find?
On the other hand, I’d probably lean toward the “ancillary use” idea. If it was my own property, I wouldn’t report any deemed disposition. If it was a client asking my advice, I’d determine the approximate probabilities of each possible outcome, then explain to the client what may happen, and how to prepare for it, and let them make the decision.
When a non-income-producing property (ie Home or Cottage) has changed to an income-producing property you can elect under subsection 45(2) to deem no change of use to have occurred and defer the resulting capital gain until the property is actually sold. This election can be made for any property, not just the principal residence. If you make this election you must report the rental income and can not claim CCA on the property. The election gets made at the time the use changes.
Paragraph 45(1)(c) applies to deem a disposition on a partial change of use. Beginning in March of 2019 you are now able to file a subsection 45(2) election even if there is a partial change of use with regard to a property. Prior to 2019 you could not elect under 45(2) for a partial change.
The CRA does have a policy of not considering a disposition to have occurred on a principal residence if the partial change of use is not substantial or permanent in nature. A few criteria have to be met.
It is the CRA’s practice not to apply the deemed disposition rule, but rather to consider that the entire property retains its nature as a principal residence, where all of the following conditions are met:
a) the income-producing use is ancillary to the main use of the property as a residence;
b) there is no structural change to the property; and
c) no CCA is claimed on the property.
Unfortunately, since this is only a “CRA Policy” and not something included in the actual act it would be difficult to know whether they would apply this policy to anything other than a principal residence (ie a cottage).
I think the safest bet would be to file a 45(2) election. I don’t see any downside to filing the election.
I tend to fall the other direction @snoplowguy …that there is no change in use as the 5-7 weeks is indeed ancillary and not enough to drive the “change”…it’s simply an “additional use” as suggested by @Nezzer. One way or another the second property is still a “capital property” and is subject to CapGains treatment on disposition. I find it hard to accept that a nominal - and admittedly temporary - change for a seasonal rental actually represents a “change in use” from a tax perspective. The “primary” (>50%) use is still as a personal property, but may no longer be “substantially” personal property (arguably >90%).
Judgment call?
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Yes, lets go with judgement call. 
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I think I would be more comfortable if the client said that she actively used it for a similar number of weeks per year as it is rented out, or by preference more weeks per year.
“Available for use” also needs to be considered, as it maybe isn’t 52 weeks a year. Many cottages aren’t accessible, or aren’t usable in Alberta (for example) for large portions of the year, so the cottage may not be available all year, increasing the %age of rental use.
You could definitely argue that it isn’t a change in use because the client has more weeks it is available than they use and if the client felt strongly about it I’d have them write up their argument as to why it isn’t a change in use, and I’d keep an eye on the site she’s using to rent it out for at least the first year to see.
Trust but verify 
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