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Conversion of rental property to principal residence

Hi everyone,

My client moved back to his principal residence last year in June which was on rent for past many years. Does the client needs to complete T2091? Also is there any election needs to be filed right now since there is change in use of property.

Best regards

Ayisha O. Ahmed

Yes. Any time there is a change of use, it is called a DEEMED sale and the change (essentially a sale to self) is reported at fair market values.

Weirdly enough, a person may designate any property they own as their principal residence in any given tax year; however, they would have to go through the exercise of reporting the deemed sale for each designation change.

Isn’t this reporting needs to be done at the time of actual disposition of property. I am attaching below articles for reference. Please advice. Thanks

https://www.manningelliott.com/blog/principal-residence-exemption-guidelines

https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c2-principal-residence.html#toc19

From Income tax Folio S1-F3-C2:

Complete change in use of a property from income-producing to principal residence

2.54 If a taxpayer has completely changed the use of a property (for which an election under subsection 45(2) is not in force) from income-producing to a principal residence, he or she is deemed by paragraph 45(1)(a) to have disposed of the property (both land and building), and immediately thereafter reacquired it, at fair market value. This deemed disposition can result in a taxable capital gain. The taxpayer may instead defer recognition of the gain to a later year by electing under subsection 45(3) that the above-mentioned deemed disposition and reacquisition under paragraph 45(1)(a) does not apply. This election is made by means of a letter to that effect signed by the taxpayer and filed with the income tax return for the year in which the property is ultimately disposed of (or earlier if a formal demand for the election is issued by the CRA). For e-filers, see the Paper documentation page on the CRA website. Also, subsection 220(3.2), in conjunction with section 600 of the Regulations, provides the authority for the CRA to accept a late-filed subsection 45(3) election. Such a late-filed election may be accepted under certain circumstances. For further particulars on the acceptance of late-filed elections, see the current version of Information Circular IC07-1.

2.55 Even if a subsection 45(3) election is filed in order to defer recognition of a gain from the change in use of a property from income-producing to principal residence, the net income from the property for the period before the change in use must still be reported. However, for purposes of reporting such net income, it should be noted that an election under subsection 45(3) is not possible if, for any tax year ending after 1984 and on or before the change in use of the property from income-producing to a principal residence, CCA has been allowed in respect of the property to:

  • the taxpayer;
  • the taxpayer’s spouse or common-law partner; or
  • a trust under which the taxpayer or his or her spouse or common-law partner is a beneficiary.

CCA so allowed would cause subsection 45(4) to nullify the subsection 45(3) election.

2.56 Similar to the treatment for a subsection 45(2) election (see ¶2.50 to 2.51), a property can qualify as a taxpayer’s principal residence for up to four tax years prior to a change in use covered by a subsection 45(3) election, in lieu of fulfilling the ordinarily inhabited rule (discussed in ¶2.10 to 2.12) for these years. As in the case of a subsection 45(2) election, residence or deemed residence in Canada during these years is necessary for the full benefit of the principal residence exemption to apply. Furthermore, the rule described in ¶2.13 to 2.14 prevents the designation of more than one property as a principal residence for any particular year by the taxpayer (or, for any particular year after the 1981 tax year, by the taxpayer or any other member of his or her family unit).