Change of Use for Principal Residence

Tax Topics
1

I want to lay out the tax treatment options regarding a client’s old principal residence which was converted to a rental property in 2024 and their new home purchased in 2024 which they live in (their 2024 T1 return is being filed late - they submitted documents late).

Options:

  1. T2091 to report deemed disposition on old home at time of change of use. Taxpayer will get a professional appraisal to determine the FMV at time of change of use, which becomes the new cost base. [In the future when the rental property is eventually sold the capital gain will be the proceeds less the cost (FMV at change of use)]. New home then becomes principal residence.

  2. Alternatively, taxpayer can file 45(2) election to defer deemed disposition on the old property/rental property. This allows the old home to still qualify as a principal residence for up to 4 years post-change (cannot claim Capital Cost Allowance). However, the new home cannot be designated as a principal residence during this election period and thus does not get the principal residence exemption.

To help taxpayers determine the best option for their circumstances:

  • Assess estimated potential gain on both residences, compare tax savings under each option, and forecast likely occupancy and ownership periods.

  • If default (reporting deemed disposition) is chosen, the process is more straightforward, but some tax benefits could be lost if the 45(2) election would have provided extra exemption years on the higher-growth property.

Does anyone have any further comments?

2

You are crystal-ball gazing whichever choice you pick. There is (virtually) no effect in the current year, so let the client decide on which property may rise in value more over the next 4 years.

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3

They should call you LargeBizGuy. Your comments are always appreciated.