TaxCycle | Products | Pricing | Training | Documentation | Support | News

Conversion of Principal residence to rental property

Hi everyone,

I have 2 questions regarding below scenario:

My client gave his principal residence on rent last year 2019. By reading “Income Tax Folio S1-F3-C2, Principal Residence”, I understand that he needs to file an election under 45(2) to defer recognition of any capital gain by writing a letter to CRA. Now, my questions are:

  1. Does he need to report this deemed disposition on Sch 3 for reporting purposes?
  2. Can letter for Sec 45(2) be attached and e-filed with his personal tax return in tax cycle?

Thank you. Your response is really appreciated.

Where Section 45 applies, a taxpayer has the choices outlined in Section 45.
.
.
.
45 (1) For the purposes of this Subdivision the following rules apply:
o (a) where a taxpayer,
 (i) having acquired property for some other purpose, has commenced at a later time to use it for the purpose of gaining or producing income, or
 (ii) having acquired property for the purpose of gaining or producing income, has commenced at a later time to use it for some other purpose,
the taxpayer shall be deemed to have
 (iii) disposed of it at that later time for proceeds equal to its fair market value at that later time, and
 (iv) immediately thereafter reacquired it at a cost equal to that fair market value;
o (b) where property has, since it was acquired by a taxpayer, been regularly used in part for the purpose of gaining or producing income and in part for some other purpose, the taxpayer shall be deemed to have acquired, for that other purpose, the proportion of the property that the use regularly made of the property for that other purpose is of the whole use regularly made of the property at a cost to the taxpayer equal to the same proportion of the cost to the taxpayer of the whole property, and, if the property has, in such a case, been disposed of, the proceeds of disposition of the proportion of the property deemed to have been acquired for that other purpose shall be deemed to be the same proportion of the proceeds of disposition of the whole property;
o © where, at any time after a taxpayer has acquired property, there has been a change in the relation between the use regularly made by the taxpayer of the property for gaining or producing income and the use regularly made of the property for other purposes,
 (i) if the use regularly made of the property for those other purposes has increased, the taxpayer shall be deemed to have
 (A) disposed of the property at that time for proceeds equal to the proportion of the fair market value of the property at that time that the amount of the increase in the use regularly made by the taxpayer of the property for those other purposes is of the whole use regularly made of the property, and
 (B) immediately thereafter reacquired the property so disposed of at a cost equal to the proceeds referred to in clause 45(1)©(i)(A), and
 (ii) if the use regularly made of the property for those other purposes has decreased, the taxpayer shall be deemed to have
 (A) disposed of the property at that time for proceeds equal to the proportion of the fair market value of the property at that time that the amount of the decrease in use regularly made by the taxpayer of the property for those other purposes is of the whole use regularly made of the property, and
 (B) immediately thereafter reacquired the property so disposed of at a cost equal to the proceeds referred to in clause 45(1)©(ii)(A); and
o (d) in applying this subsection in respect of a non-resident taxpayer, a reference to “gaining or producing income” shall be read as a reference to “gaining or producing income from a source in Canada”.
.
.
(2) For the purposes of this Subdivision and section 13, where subparagraph 45(1)(a)(i) or paragraph 13(7)(b) would otherwise apply to any property of a taxpayer for a taxation year and the taxpayer so elects in respect of the property in the taxpayer’s return of income for the year under this Part, the taxpayer shall be deemed not to have begun to use the property for the purpose of gaining or producing income except that, if in the taxpayer’s return of income under this Part for a subsequent taxation year the taxpayer rescinds the election in respect of the property, the taxpayer shall be deemed to have begun so to use the property on the first day of that subsequent year.
.
.
(3) Where at any time a property that was acquired by a taxpayer for the purpose of gaining or producing income ceases to be used for that purpose and becomes the principal residence of the taxpayer, subsection 45(1) shall not apply to deem the taxpayer to have disposed of the property at that time and to have reacquired it immediately thereafter if the taxpayer so elects by notifying the Minister in writing on or before the earlier of
o (a) the day that is 90 days after a demand by the Minister for an election under this subsection is sent to the taxpayer, and
o (b) the taxpayer’s filing-due date for the taxation year in which the property is actually disposed of by the taxpayer.
.
.
(4) Notwithstanding subsection 45(3), an election described in that subsection shall be deemed not to have been made in respect of a change in use of property if any deduction in respect of the property has been allowed for any taxation year ending after 1984 and on or before the change in use under regulations made under paragraph 20(1)(a) to the taxpayer, the taxpayer’s spouse or common-law partner or a trust under which the taxpayer or the taxpayer’s spouse or common-law partner is a beneficiary.
.

@owais.ahmed

If you’re filing a 45(2) election, you DON’T report it as a disposition - that’s the whole point of 45(2). You are supposed to file the election “with” the tax return, but last time I did one, I couldn’t “attach” it to an EFILED return - I used the Submit Documents service via RAC. You can also file the election later, but then you have to include the payment for penalties on late filing.

I’ve just mailed in the letter in the past.

Nezzer, didn’t think there was a specific late filing penalty for 45(2) - other than the usual $100/month - but that it would be at the CRA’s discretion to accept it?

Thanks Nezzer . I always find your answer really helpful. Now the question arises that will be there any penalties now since he is filing after June 1, 2020 deadline? Also, the payment deadlines are extended till Sep 1, 2020.

@CGTax

Yes - I meant the $100 per month, and yes - it’s still the minister’s discretion whether to accept it.

@owais.ahmed

I haven’t memorized the details of the COVID-19 deferral of late filing penalties, so I’m not sure if a 45(2) election qualifies for that. Sorry - you might have to do some digging yourself. You might find some helpful info here:
https://www.videotax.com/covid19

Hi Nezzer,

I want to submit 45(2) letter via RAC but which option should i choose? It is asking the reason for your submission. Shall i choose Change or Adjust your personal tax return?

Thanks

@owais.ahmed
It seems the options have changed. I can’t remember which one I used, but I think there was another option for “other documents” which included certain elections. Looking at it now, I can’t find an option that seems appropriate. I do not think “Change or Adjust your tax return” would be appropriate. You might have to mail it. Sorry!

Thank you for your prompt support. Really appreciated!!