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Sold principal residence moved into Rental unit

I am filing back taxes for a client. He was living in his principal residence (P1) in 2011. He purchased a property(P2) in 2011. He moved into the newly purchased property (P2) at that time and moved out of his principal residence (P1) and began renting it. He rented P1 until 2017. At which time he sold P2.

He never filed an election to change the status of the P1. He has an appraisal on P1 for 2011 and 2017.

The gain was higher on P1 than P2.

Can he - 1.Keep the PR status on P1 and claim the gain on P2? If so, does he have to file the
T2091?
or 2. File an election to change PR to rental in 2011 and then again in 2017 back to PR and
claim the gain on P1?

Thanks,

Gerry

Hi Gerry, your client should file subsection 45(2) election to be deemed not to have made the change in use of the property when he rented out the P1, so P1 continued to his principal residency up 4 years. He should file subsection 45(3) election so he can designate the property as his principal residence for up to 4 years before he actually occupy it as his principal residence. Therefore your client can designate his P1as his principal residence for 8 years during he rented out P1, and he does not need to pay tax on capital gain of P1. He will need to pay tax on capital gain of P2 as he is allow to designate one principal residency at one time. As the gain of P1 is higher than P2, it is better to designate P1 as his principal residence when he owned two properties at the same time.

David

There is a penalty for late filing the 45(2) Election.

Perhaps you should check out: https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/complaints-disputes/late-amended-revoked-elections/penalty-accepting-a-late-amended-revoked-election.html

In this case, Gerry’s client should only file subsection 45(3) election in the year he sells P1 to avoid the late filing penalty. 45(3) election allows up to 4 years (2013-2016), so only 2012 will be the only year he can not designate P1 as principal resident instead he can designate P2 as principal residence in 2012.

Thanks guys for your help

Thanks Tim

6 months ago, One of my clients told the bank that he is buying this property as an investment (rental) property(house) at the time of getting the Mortgage. He never rent this house. Due to some issues in the family, he moved in the house. Do he need to file a subsection 45(2) or 45(3) election or not?

The information provided to the bank is not transferred to the CRA, unless your client has done so.

As far as the CRA is concerned that property was only resided by the taxpayer. A property which has not changed use does not require an election.

1 Like

Thanks Tim, I told him something two weeks ago, he told the bank for some reason that he is staying in the house and back told him to discuss this with his accountant. Then I saw this thread here, so I thought I should find out if there is a new requirement from CRA. Thanks again.