Change of use and t2091

T1
1

If there is a change of use from Principal residence to Rental property and therefore a deemed disposition. Is a T2091 required

2

Yes; unless you are filing a subsection 45(2) election OR you are not claiming the Principal Residence exemption on the capital gain a T2091 is required.

If you are going the “deemed disposition route” and if you are adding the building portion of property to the T776 CCA Schedule as depreciable property please note that you can only bump the Capital Cost by half of the gain. For instance; if the taxpayer’s initial ACB of the house portion was 100,000 and the deemed disposition proceeds allocated to the building was for 400,000 (gain of 300k) you are only permitted to add the capital cost of the house on the T776 as 250,000 (being the initial 100,000 plus 150,000 of the gain). Of course, your new ACB for disposition purposes would be the full $400k… you just can’t deduct CCA based on $400.

3

As a rule we do not normally add building for CCA purposes but I was not aware of the 1/2 gain bump up.

Thank you

4

I am wondering how common this happens in practice. In a real estate market like the GTA where most property owners are sitting on inflated unrealized capital gains, it seems almost impossible for someone who just wants to make some extra cash by renting out their property, to have to pay all that tax on a paper gain!

Most clients don’t know or understand these change in use rules. I have someone who currently has a rental cottage that they want to convert to personal use. I’m inclined to say don’t bother! The tax implications, not to mention the GST issues, are too onerous.

5

… but even with a deemed disposition they may be able to claim their principal residence exemption to effectively eliminate any tax payable on the capital gain and essentially bring their property’s cost up to the FMV on the date they moved out and began renting the property. There would be no tax to pay on the paper gain in that situation.

… regarding a rental cottage or property that is converted into a principal residence… provided no CCA has ever been claimed on the cottage, a subsection 45(3) election can be filed in the year of its eventual sale (or earlier if requested by CRA) to defer the capital gain on the cottage until the date that property is sold.

6

True in these situations there is no impact but what if it’s not their principal residence? In the cottage situation, this is a secondary property for the family and they need their PR exemption for their primary home. They took the full GST ITC on purchase of the cottage because it’s used more than 90% of the time for short term rentals. A change in use would be a mess in this situation. There are other people in this cottage resort who seem to go back and forth (rental and personal use) and I wonder if they have reported the change. :thinking:

7

Is anyone able to confirm my thoughts on this situation with a client:

The Facts:

  • On Jan. 2, 2013: Client purchased a home for her Principal Residence.
  • On Nov 1, 2013, Change of Use to Rental Property.
  • On Nov. 1, 2014, Change of Use back to Principal Residence (1 year later)
  • Rental Income claimed on both 2013 and 2014 tax returns. No CCA claimed.
  • Sold June 2019.

My thoughts:

  • No elections were submitted to CRA, ie: subsection 45(2).
    Too late to file this election due to the time lapse
    (late filing fees would be > $5,000 if CRA accepts it).
  • Principal residence Jan 2, 2013 to Oct. 31, 2013.
    Reporting was not required in 2013 for the PRE, so it stays unreported.
  • Nov. 1, 2013 to Oct. 31, 2014: Rental Property.
    Capital Gain reported based on FMV on both dates. [Can Adjusted Cost base include any costs incurred from the original purchase date (ie: lawyer and realtor fees from January 2013’s purchase), or any capital repairs between Jan. 1 to Oct. 31, 2013? I’m thinking NOT since those would have been applicable to the principal residence portion and therefore not useable. I’m thinking only capital improvements during this one year rental period would be claimable. Please confirm these thoughts.]
  • A 2019 T1 Adjustment would be paper filed to include both the capital gain and a late filed T2091, using the Nov. 1, 2014 FMV to June 2019 dates for the personal residence exemption = 5 + 1 = 6 yrs.
  • Any insights into whether CRA is charging penalties for late filed T2091 forms?
    Should we include a request asking for Taxpayer Relief from any penalties?
8

Using the PRE formula would give you 6/6 years = 100% covered by the PRE since purchase in Jan 2013. The other option would be to obtain a valuation as of Oct 2013, and again as of Oct 2014, then report the taxable gain on a 2014 T1-ADJ.

P.S. did the FMV really change that much from Oct 2013 to Oct 2014?

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9

Thanks for the reply, @Nezzer.

I’m thinking the same thing, that the PRE +1 rule would wipe out any need to claim a capital gain. In this case, claiming 2013, 2015 to 2019 as PRE = 6 / 7.
So adjusted cost base and outlays & expenses won’t have to be reported since the net gain is zero.

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