All the Numbers

Change of use

From the All the Numbers wiki · Renting part of a home

A home is personal-use property. Once a part of it starts to earn income, or an income property becomes a home, the property has changed use, and the Income Tax Act has a rule for the day it happens.

The default rule

For a full change of use, the property is treated as sold at its fair market value and bought back at that amount. For a partial change, such as renting a basement suite, only the share that changed is treated that way.[1] The deemed sale produces a capital gain if the value is above the cost. When the part that changed was lived in, the gain is covered by the principal-residence exemption for the years it was a home. The rented share then starts again with a cost equal to its market value on that day.

An appraisal is the usual way to support the market value. The engine will not run a change of use without one.

The exception the CRA allows

The CRA does not apply the rule when the rental is ancillary to living in the home, no structural change is made and no capital cost allowance is claimed. A self-contained suite is the guidance's own example of a structural change.[2][3] This is a CRA administrative practice rather than a section of the Act, and the engine applies it only when the plan states it, never by judging whether a suite is small enough.

The elections

Two elections let the property keep being treated as a principal residence for a few years without a deemed sale:

  • When it starts to earn rent (45(2)). The property can still be designated as a principal residence for up to four tax years after the change, provided no CCA is claimed, the owner is resident in Canada and no other property is designated for those years.[4]
  • When it goes back to personal use (45(3)). Up to four tax years before the change back can be designated. The election is void if CCA was claimed after 1984.[5]

Only one property can be designated for a given year by a family. The employment-relocation extension of the first election, which has no four-year limit, is not modelled.

The cost for a later write-off

If the property has been changed to income use by a deemed sale, the cost used for CCA is the lesser of the market value and the original cost plus one half of the gain (market value less cost). For a partial change of use the figures are taken in proportion to the share that changed.[6]

What the engine and the planner do

  • The engine handles a change of use as a deemed sale at the appraised market value, as an ancillary use that has no tax effect, or with either election. It applies the exemption years to the deemed sale and starts a new cost for the rented share.
  • The planner does not offer a change of use. It treats a home with a suite as rented from the day of purchase, with the rental ancillary, and says so; it therefore applies no deemed sale and no CCA. If your suite is a structural conversion, the tax on a sale will be higher than the plan shows. See renting part of your home.

See also

  • Capital cost allowance · Capital cost allowance (CCA) is the tax write-off for the building part of a rental property, at 4% of the remaining balance a year for most rental buildings. Claiming it can cost the principal-residence exemption on a rented home and creates recapture on a sale, so the planner never claims it.
  • Capital gains and the adjusted cost base · Selling an investment for more than its adjusted cost base is a capital gain, and half of it is added to taxable income in the year of the sale. Growth that has not been sold is not taxed.
  • Renting out part of your home · Suite income is taxable and its expenses are deductible on the rented portion, but renting can also limit the principal-residence exemption on the eventual sale. The planner assumes the rental use stays ancillary, so the whole gain on a sale stays exempt, and says it assumed so.
  • Selling a home · A sale turns the home's projected market value into cash after selling costs of 5.8% and the mortgage payout. The gain on a principal residence is exempt from tax, apart from the part that was rented out when the exemption does not cover it.

References

  1. ↑Income Tax Act s.45 · Change of use (full 45(1)(a), partial 45(1)(c)): deemed disposition at FMV (proportionate for partial) and reacquisition at that amount · effective 1972-01-01
  2. ↑Income Tax Folio S1-F3-C2, Principal Residence · Folio S1-F3-C2: full PRE retained only if income use is ancillary, no structural change, and no CCA claimed; claiming CCA triggers deemed disposition of the rented portion · effective 2019-03-19
  3. ↑Income Tax Folio S1-F3-C2, Principal Residence · CRA practice: no deemed disposition and the whole property stays a principal residence when income use is ancillary, there is no structural change and no CCA is claimed; a self-contained suite is a structural change · effective 1972-01-01
  4. ↑Income Tax Folio S1-F3-C2, Principal Residence · Subsection 45(2) election: property may still be designated principal residence for up to this many tax years after the change to income use (no CCA, resident in Canada, no other designation) · 4 years · effective 2019-03-19
  5. ↑Income Tax Folio S1-F3-C2, Principal Residence · Subsection 45(3) election: up to this many tax years before the change to personal use may be designated; void if CCA was claimed after 1984 (45(4)) · 4 years · effective 2019-03-19
  6. ↑Income Tax Act s.13 · Capital cost for CCA when property starts income use = lesser of FMV and cost + this fraction of (FMV − cost); proportionate under 13(7)(d) · 50% · effective 1972-01-01