Change in use rules: when a home becomes a rental property, or the reverse

Renting out your old home feels simple, but for tax it is a sale: the Income Tax Act treats a switch between personal and income-producing use as a disposition at fair market value, creating a gain with no cash. Elections can defer it, if you meet their conditions and deadlines.

Change in use of a property: the general rule

A change in use is a deemed disposition and immediate reacquisition at fair market value. That value becomes your new adjusted cost base, closing off the gain accrued so far and starting a fresh clock.

Gain for the years the property was your principal residence is generally sheltered by the exemption; only the gain for other years is reportable.

Home becomes a rental: the subsection 45(2) election

Turning your principal residence into a rental or business property? You can elect not to be treated as starting income-producing use, so no gain is reported then. The conditions:

• You cannot claim capital cost allowance on the property while the election is in effect.
• The net rental income still has to be reported, every year.
• You can designate the property as your principal residence for up to four years even though you are not living in it — provided you designate no other property as your principal residence for those years and you are resident, or deemed resident, in Canada.

The four-year limit can be extended indefinitely in one specific situation: an employer-required relocation. All of these must hold — you live away because your employer, or your spouse’s or common-law partner’s employer, wants the relocation; you are not related to that employer. You must also return to the original home while still with that employer, or before the end of the year following the year that employment ends, or you die during it; and the original home is at least 40 kilometres further from the new workplace, by the shortest public route, than the temporary residence.

To make the election, attach a signed letter to the tax return for the year of the change describing the property and stating that you want subsection 45(2) to apply. For a 45(2) election CRA looks for that signed letter with the return for the year of the change, and no CCA claimed while it is in effect.

Rental becomes a home: the subsection 45(3) election

Going the other way, you can elect to postpone reporting the disposition until you actually sell the property. Two restrictions matter:

• You cannot make this election if capital cost allowance was deducted on the property by you, your spouse or common-law partner, or a trust under which either is a beneficiary, for any tax year after 1984 and on or before the day the use changed.
• The election applies only to the capital gain. If CCA was claimed before 1985, recapture must still be included in income in the year the use changed.

It lets you designate the property as your principal residence for up to four years before you move in, if made by the earlier of 90 days after the CRA asks and the filing date for the year of sale.

This is why experienced advisers hesitate to claim capital cost allowance on a rental: a modest deduction can close off this election years later, one reason the current versus capital expense decision reaches beyond the current year.

Partial changes in use

Renting a basement suite or using part of a home for business is a partial change in use. Since 19 March 2019, depending on the circumstances, a subsection 45(2) or 45(3) election can switch off the deemed disposition on a partial change. That means the CRA 45(2) and 45(3) elections can now reach, depending on the circumstances, a basement suite or partial business use as well as a full change in use.

Even without an election, the CRA generally will not treat a partial change as having occurred if all three of the following hold:

• the rental or business use is relatively small about the use as your principal residence;
• you make no structural changes to the property to make it more suitable for rental or business use; and
• you do not deduct any CCA on the part used for rental or business.

Fail any one and that portion is generally deemed disposed of at its share of fair market value. The same three conditions protect a home office, as our guide to the principal residence exemption and business use explains.

Fixing the capital cost when the use changes

When personal-use property becomes a rental, you need its capital cost for CCA. If the fair market value of the depreciable property at the change is less than original cost, capital cost is that value, excluding land. If it is more, capital cost is original cost plus half the excess, adjusted for any capital gains deductions claimed. Land is acquired at fair market value. So get a defensible valuation at the date of the change; you will need it twice.

The bottom line

A change in use is taxable even with no cash. Before the move, decide whether an election is available and wanted, get a valuation at the date of the change, and remember that CCA can foreclose options. A conversation with a CPA who works with real estate investors costs far less than finding out afterwards.

Whether any of this applies to you turns on your year-end, your structure and what else is in the picture — ask about your own situation and a CPA replies, usually the same business day. Free either way.

A deemed disposition creates a number that has to go somewhere: the return that reports it.

This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and your situation is unique, so please speak with a CPA before acting on anything here.

Working through this locally? We advise owners on it as an accountant in Abbotsford.