--- title: "45(2) Election and Change in Use Rules for Rental Property" url: https://www.everstonecpa.com/blog/change-in-use-rules-property-canada description: "Change in use of a property: rent out your home and the CRA deems a sale at market value. The 45(2) and 45(3) elections defer it; when neither works." type: guide updated: 2026-10-08 summary: "When a property changes between personal and income-producing use, the Income Tax Act generally treats the owner as having sold it at fair market value and immediately reacquired it. That deemed disposition can trigger a taxable gain, though elections under subsection 45(2) or 45(3) may defer it." faq_count: 6 publisher: EverStone CPA Inc., a Chartered Professional Accountant firm registered with CPA British Columbia and CPA Alberta service_area: British Columbia, Alberta, Ontario and Manitoba language: en-CA contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online --- [Home](https://www.everstonecpa.com/) [Blog](https://www.everstonecpa.com/blog) Change in Use Rules for Property Change in use # Change in use rules: when a home becomes a rental property, or the reverse By EverStone CPA · Reviewed August 2026 · 8 min read 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. **Quick answer:** When a property changes between personal and income-producing use, the Income Tax Act generally treats the owner as having sold it at fair market value and immediately reacquired it. That deemed disposition can trigger a taxable gain, though elections under subsection 45(2) or 45(3) may defer it. **Renting out a home you lived in, or moving into a rental?** We assess the deemed sale, file the 45(2) or 45(3) election where it helps and report it on your return, at a fee quoted in writing. [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=personal#enquiry-form) A taxable event in a year when no money changes hands. ## 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. **Turning your home into a rental, or moving back in?** We file the subsection 45(2) or 45(3) election with the return and track the cost base for the eventual sale: rental returns are commonly $275–$500, quoted first. See [our rental tax returns](https://www.everstonecpa.com/rental-income-tax-return), or [get a quote](https://www.everstonecpa.com/book-online). [Get My Fixed Quote](https://www.everstonecpa.com/book-online) ## 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](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance.html) on a rental: a modest deduction can close off this election years later, one reason the [current versus capital expense](https://www.everstonecpa.com/blog/rental-property-current-vs-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](https://www.everstonecpa.com/blog/principal-residence-exemption-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](https://www.everstonecpa.com/accountant-for-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](https://www.everstonecpa.com/quick-question) 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](https://www.everstonecpa.com/personal-taxes). Sources - [Canada Revenue Agency — Principal residence and other real estate: changes in use and special situations](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate.html) - [Canada Revenue Agency — Guide T4036, Rental Income (changing from personal to rental use)](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income.html) 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](https://www.everstonecpa.com/book-online) before acting on anything here. About this article **EverStone CPA** Prepared and reviewed by a CPA at EverStone CPA, serving businesses in BC, Alberta, Ontario and Manitoba. [About the firm →](https://www.everstonecpa.com/about) · [Send an enquiry →](https://www.everstonecpa.com/book-online) Working through this locally? We advise owners on it as an [accountant in Abbotsford](https://www.everstonecpa.com/accountant-abbotsford). ### Keep reading [Principal residence and business use →](https://www.everstonecpa.com/blog/principal-residence-exemption-business-use) [Current vs capital expense →](https://www.everstonecpa.com/blog/rental-property-current-vs-capital-expense) [For real estate investors →](https://www.everstonecpa.com/accountant-for-real-estate-investors)[Selling a rental property: recapture, capital gain and the order the numbers work in →](https://www.everstonecpa.com/blog/selling-a-rental-property-canada-tax)[CPA vs Tax Preparer in Canada: What the Letters Actually Change →](https://www.everstonecpa.com/blog/cpa-vs-tax-preparer-canada) Common questions ## Frequently asked questions about change in Use Rules for Property **What is a change in use for tax purposes?** A change between personal and income-producing use, in either direction. You are generally treated as disposing of the property at fair market value and reacquiring it at that value, which can trigger a [capital gain](https://www.everstonecpa.com/investment-income-and-capital-gains) with no sale. That value becomes your new cost base. **Can I avoid the deemed disposition when I turn my home into a rental?** Elect under subsection 45(2) not to be treated as starting income-producing use, so no gain is reported. You cannot claim CCA meanwhile, still report net [rental income](https://www.everstonecpa.com/rental-income-tax-return), and make it by signed letter with the return for the year of the change. **How long can I designate a property as my principal residence while renting it out?** While a subsection 45(2) election is in effect 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 for those years and you are resident or deemed resident in Canada. The four-year limit can be extended indefinitely where an employer-required relocation meets a specific set of conditions, including a 40-kilometre distance test. **What stops me electing when a rental becomes my home?** Claiming capital cost allowance. The subsection 45(3) election cannot be made if CCA 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 up to the day the use changed. The election also only covers the capital gain, not recapture of CCA claimed before 1985. **Does renting out my basement trigger a change in use?** Not necessarily. The CRA generally sees no partial change where the rental or business use is small relative to your residence use, there are no structural changes for it, and no CCA is claimed on that part. Fail any of those and that portion is generally deemed disposed of. **Do I need an appraisal when the use changes?** A defensible fair market value at the date of the change, ideally from a formal appraisal. It sets the deemed proceeds, your new cost base and the capital cost for CCA, and you will need it again on sale, when it is much harder to establish. ## Converting a property? Email us the dates and what the property was worth at the change. A CPA replies by email within one business day with whether an election helps and a fixed fee for the return. [Get My Fixed Quote](https://www.everstonecpa.com/book-online)[Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) ## Have a question about this? Ask free through [the quick-question form](https://www.everstonecpa.com/quick-question); a CPA replies within one business day. Need more? A 45-minute **Advice Call** is $225 plus GST, credited to your first invoice if you become a client within 60 days. Want us to take it on? [Send an enquiry](https://www.everstonecpa.com/book-online). [Ask a Free Question](https://www.everstonecpa.com/quick-question) [Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) Email info@everstonecpa.com ★★★★★ “…We switched to him last year for both our personal and small-business taxes — responsive, knowledgeable and quick.” Heather Powers · Google review **Run your own numbers with the free calculators:** [check your GST/HST math](https://www.everstonecpa.com/gst-hst-calculator) · [run the incorporate-or-not numbers](https://www.everstonecpa.com/incorporation-calculator) · [Payroll deduction calculator](https://www.everstonecpa.com/payroll-deduction-calculator) [← Cash vs accrual accounting: which basis your business has to use](https://www.everstonecpa.com/blog/cash-vs-accrual-accounting-canada) [Charitable donations: giving personally versus giving through your corporation →](https://www.everstonecpa.com/blog/charitable-donations-personal-vs-corporate) --- Source: https://www.everstonecpa.com/blog/change-in-use-rules-property-canada Prices: https://www.everstonecpa.com/pricing · Contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online