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.
Thanks
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.
Thanks, @Nezzer … that’s how I envisioned it to work. Thought this was a good time to seek clarification on this. Much appreciated.
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).
One of the most important documents and they don’t accept an electronic submission. Quite ridiculous…
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.
So here we are 21 months later and the CRA FINALLY responded to my late filed 45(2) election! The letter said that they would accept the election only if she pays $1100 in fines by January 25th (you called it @GuyWhoPlaysGolf ).
The irony is, so many years have gone by that my client has already moved back into said home! So now I am wondering if I could just revoke the 45(2), and file a 45(3) for 2024? In this case would I have to go back to her 2021 tax return and report the deemed disposition on change in use? Could CRA deny the principal residence exemption on the DD because it’s so late? Or perhaps another penalty?
Appreciate thoughts of this community. Thanks!
Using the case number, you can write a letter to the auditor that your client does not wish to proceed with the 45(2) election notice. They will then send another letter stating that they have closed the file.
I don’t recommend that, it will make situations more complicated. A 45(3) election is made in the year of sale, not the year of the change in use. Lets say they sold their property in 2026, the 45(3) election notice would need to be filed in that way they can claim the exempted years plus 1. I would however recommend your client have their property appraised on the year of change of use. That way when they do sell their property, you have properly documented figures.
Thank you @GuyWhoPlaysGolf ! Will my client be penalized for not reporting the change in use in the year it happened?
So in your example of selling in 2026, I would filed the 45(3) along with the T2091 and that’s all that needs to be done? I would just add the 4 years to the number of years she’s designating as her PR and assume the election will be accepted?
Thanks!
As far as I know, there are no penalties. Like I mentioned earlier, 45(3) election is submitted on the year the property has been sold.
Correct. I’d recommend their return be filed by paper with the election notice included, in that way there won’t be any confusions. Your client will then receive the NoA along with the 45(3) acknowledgement letter.
Also remember Election 45(2) can also be for 10 years vs 4 if the owner is renting it out because of their working situation ie they had to move for work and don’t own the property at their new job site and of course not related to their employer.
Follow up question regarding the 45(3). Does the taxpayer have to live in the property (or “ordinarily inhabit” it) for a minimum period of time after the change in use back to personal? So if she moves back in and sells within 6 months, can the 45(3) still be applied?
From your original post, it sounds like a 45(3) doesn’t apply. If she moved back in within the 4 years covered by the 45(2), there is no gain to report.
45(3) is used to report capital gains that normally “should have been” reported in a prior year. For example, if a 45(2) didn’t apply, and she had the house rented out for a few years, there would normally be a capital gain to report in the year she moved back in. 45(3) allows her to defer reporting that gain until she actually sells her house. So, at the time she moves back in, she reports nothing. Then, years later, when she sells the house, she reports a taxable gain based on the years it was not a principal residence - and she includes a 45(3) election with that tax return.