I have a new client this year who began renting her principal residence in 2021 and moved in with her mother. Her previous accountant didn’t report the change in use or file the 45(2) election on her 2021 tax return. The problem is she also owns another rental property. Has anyone had experience with CRA accepting a late filed 45(2) election and did they impose any penalties on it? No CCA was taken.
I have had them accept late filed 45(2) elections although in that case it was someone would went abroad for a few years and moved back into their home for a bit then sold it just after they got back. It was also probably 15 years ago. We attached the 45(2) election to the paperfiled return and reported it as a principal residence deduction on form T2091 for the entire period they owned the property. No issues or push back from the CRA.
On this same topic of the 45(2) Election (my first time filing one for a client), we are filing on time, however my client is worried her tenant isn’t stable and is wondering if we should submit the election one year at a time. Typically the election is a 4 year election vs one year at a time. Do anyone have experience with this? If we request 4 years, can my client move back in before those 4 years are up, or only request one year, and then request a second year, etc? I haven’t found documentation on that aspect of this election.
It’s a single election to delay the “change in use” date for UP TO four years. It is not a “one year at a time” thing. She can move back in at any time.
Without the election, she would have to report the disposition of her principal residence in the year she started renting it (i.e. on S3 and T2091), and she would have to report the sale of an income-producing-property (i.e. reporting any capital gains/losses) when she moves back in.
You may submit a late filed 45(2) election as long as there was no CCA that was claimed for the building structure.
Only one property can be considered as principle residence therefore you are allowed to file 45(2) for that one property. However, there is a caveat to this where if a client owns multiple properties, the CRA may not accept a late filed 45(2) election as they may interpret it as a retroactive tax planning.
Unfortunately, the acceptance of a late filed 45(2) election depends on the CRA agent that is dealing with the matter. Last year, I had advised a client of mine to mail the election letter before the April 30 deadline however they had forgotten to mail it. I ended up mailing it myself and provided an explanation as to why it was sent late, thankfully they accepted it.
@kozakworld When you prepare the 45(2) election, make sure you write on the letter, “Please mail confirmation that the CRA has received my 45(2) election letter to me.” The CRA will send the client a letter that they have accepted the request.
Thanks, @GuyWhoPlaysGolf … Yes, I already had that clause in the election letter requesting CRA to mail a confirmation that they received the letter. I also listed my client’s current mailing address, the address of the property in question for the election, the year the property was purchased, and the date the election starts. My client signed the letter and I’ll be dropping it off in the Blue Bin at CRA later today. I checked online if this election can be submitted using Submit Documents, but sadly the 45(2) is not part of the election documents that they accept electronically (unless it’s coded by a different form number).
Thanks! Did CRA impose a penalty for the late filing? I am familiar with the rules but I am wondering CRA’s flexibility in certain cases where no taxes would otherwise be due, it’s just the paperwork. The change in use should have been reported in 2021. Although the client reported her rental income and no CCA, no change in use was reported. So it’s either a late filed T2091 or a late filed 45(2). The posted penalties for a late T2091 is $100 per month.
This client was previously with a mid sized accounting firm. How did they miss the change in use? Her home address one year becomes the address of her rental property next… shouldn’t the accountant ask the question? Perhaps some accountants try to process too many T1s in tax season and don’t take the time in the details.
What happens if I do nothing? Could she get re-assessed for a deemed disposition in 2021?
In my client’s case, I had explained to the CRA regarding reason for the late filing. I was anticipating for a penalty and had even notified my client about it but thankfully in such few instances, the CRA did not add any penalties.
I would suggest that you send the 45(2) election, even if there are penalties to be paid. There isn’t really much information on the penalties but if we were to use the $100 figure, I would say she could potentially owe $1,100 in penalties ($100 *11 months). However it is better than having to pay for capital gains tax when she ends up disposing her property. It also makes things less complicated.
It may either be the fact that the client did not provide the disclosure or the accountant is not well versed with the ITA. Not a lot of firms know about the 45(2) election. People need to understand that the 45(2) election is an incredibly important document and without it, they could in the future, be paying a lot of taxes.
I have a buddy of mine that works for the CRA, he’s told me that the CRA has an extensive database of tax payers on where they reside, whether they rent or own a property, etc. You may be taking a potential risk in the future. I’d suggest long-term thinking is better than short-term thinking.
I had a client who sold her principal residence in 2019 and didn’t file the T2091 form. Reviewing her tax docs in 2021, I caught this and we filed a late T2091. In my cover letter, I explained that the client was unaware of the legislation changes that required reporting of the Principal Residence. CRA accepted the late filed T2091 and did not impose a late filing penalty.
I would agree with @GuyWhoPlaysGolf that it’s worth submitting the late filed 45(2) with an explanation of why it’s filed late. Hopefully CRA will accept it.