I have a client who purchased a townhouse in 2004 and lived in it until 2011, then began renting it out. She never did a change of use at that time, but did claim the income and expenses each year on her taxes. In 2015 she moved back in and it became her principle residence. It was rental property for 4 years. Again in 2015 she never did a change of use. In 2019, she sold the property. When I do the sale of property on her taxes, what is the best way to handle it? Do I need to do the late election for the years it was rented? I know she can designate it as her principle residence for up to 4 years if she didn’t live in it due to working elsewhere, but can that still be done now after the fact? I want to do the best thing for her to minimize any capital gains.
Late, amended or revoked elections
(3.2) The Minister may extend the time for making an election or grant permission to amend or revoke an election if
(a) the election was otherwise required to be made by a taxpayer or by a partnership, under a prescribed provision, on or before a day in a taxation year of the taxpayer (or in the case of a partnership, a fiscal period of the partnership); and
(b) the taxpayer or the partnership applies, on or before the day that is ten calendar years after the end of the taxation year or the fiscal period, to the Minister for that extension or permission.
CRA may accept a late -filed 45(2) election as long as no capital cost allowance has been claimed for the rental property. … If a taxpayer owns multiple properties, CRA may not accept a late -filed 45(2) election as it could be construed as retroactive tax planning.
Where was she living from 2011 to 2015? Did she own another house? If so, you have to decide which of the houses should be considered her principal residence during that period - even if you file the 45(2) election, you can have only ONE principal residence. If there was a significant gain on the sale of the “first” house in 2015, she may want to use the principal residence exemption for that, in which case the 45(2) election wouldn’t help her. You can still use the formula for calculating the principal residence exemption:
capital gain x (total years lived in the house +1) ÷ (total years the house was owned)
On the other hand, if she was renting a place from 2011 to 2015, the 45(2) election might be the best option, provided the Minister allows it.