hi, i have question folks. If the client purchase new house in June 2022 as their residence and rented out the old house, should we tick yes or no on the 1st page questions "Did you sell home in 2022 and what to claim the principal residence exemption?
Do not misunderstood the question, the explanation here is
If the client did not sell their old house in 2022 and is continuing to rent it out, then the answer to the question “Did you sell home in 2022 and what to claim the principal residence exemption?” should be “No.”
The principal residence exemption is a tax benefit that allows individuals to avoid paying capital gains tax on the sale of their primary residence. Since the client did not sell their old house in 2022 and is renting it out, it is not their primary residence and therefore does not qualify for the principal residence exemption.
Ok…but need to include T777 as rental income for that old house…with cap gain minus any acb or expenses related to the old house…and the address now appear on their T1 would be the new house they bought (being the current principal res). Is it right?
Also, if there is a change of in use in the old house (from principal residence to Income producing) but there is no disposal occurred, is 45(2) still required? any idea please? thank you.
This individual purchased and moved into a NEW principal residence for themselves in 2022.
Thus, there is NO PLAN to move back into that old property. It has been converted to Rental Property and from the limited information provided, will probably stay that way until it is sold.
What this means is that the 45(2) election is not an option since: a) No plans to return to the old residence; b) the client will have another principal residence (the new home).
Further, the 45(3) election would also not be possible because your client is designating their new property as their principal residence.
It is clear a change of use has taken place in 2022 from Principal Residence to Rental Property.
The T2091 Principal Residence Designation form needs to be submitted to state that the now Rental Property was this client’s Principal Residence for ALL years from the time it was purchased until this change of use occurred. This way the client will be exempt from paying capital gains on that property during that period of ownership.
If, on the other hand, the client did NOT purchase a new residence, did not declare another residence to be their Principal Residence, and filed the 45(2) elections, then they would NOT have to file the T2091 Designation. This is not the case.
Your client should acquire a Fair Market Appraisal or Valuation of the property for the date the change of use took place. Many clients want to use the property value stated on the Property Tax Assessment, but these assessments are often done in two year intervals and usually don’t accurately reflect the current market conditions. When the property is sold years later, the capital gain/loss will be based on the Rental Time period only and declared on Schedule 3. Since the T2091 form had already been submitted with the 2022 taxes, it would not be submitted again. From 2022 forward, the property is an income producing property.
If any of the elections will be filed on a property, ie: 45(2) or 45(3), you cannot declare CCA on the Rental property as that will nullify the elections. In your client’s case, with no intention to re-designate that property as a Principal Residence, it should be OK to claim CCA on the property. However, we don’t recommend claiming CCA on business property because at the time of sale, you may have a Recapture of CCA meaning the client will have to repay some of that CCA back and that could amount to a lot of money to pay back.
If the client wants to use the 45(2) election, then tick the box “No”, and you/they will have to file the election. However, note that you can have only one principal residence at a time. If your client uses the 45(2) election to delay the change in use on the old house, the new house cannot be considered a principal residence for that period, which means they may have a taxable capital gain when they sell the new house.
Filing a written election under subsection 45(2) can serve 2 useful purposes;
1 - If you elect under 45(2) then you can indefinitely defer the “change of use” deemed disposition that would have occurred by virtue of 45(1). By indefinitely I mean until the property is actually sold.
2 - The second benefit of electing under subsection 45(2) is the option to claim the principal residence exemption on that property for up to an additional 4 years while you are using it to earn income.
The election remains in effect until you cancel the election in writing, sell the property, or is automatically cancelled the first day of the 2nd year after you make a Capital Cost Allowance claim on the house.
My understanding is you make the principal residence designation (as well as which particular years up to the allowable 4 additional years) at the time you cancel the election or actually sell the property. I don’t believe you are under any obligation to claim the property as a principal residence for any of the 4 additional years if you wanted to preserve those years for another property.
You are correct. Thanks for making that clear. My wording was poor. Filing the 45(2) election doesn’t force one or the other property to BE the principal residence.
However, my main point was that you can have only one principal residence at a time, and the client will need to be aware that when they sell the rental property, if they include that extra 4 years as principal residence, they will not be able to report (in the future) that the new house was their principal residence for all the years they owned it. They will have to calculate the gain accrued in the first 4 years, which will require some kind of valuation at that 4 year mark.