Changing part of your principal residence to a rental or business property or vice versa

Before March 19, 2019, you could not elect to avoid the deemed disposition that occurs on a partial change in the use of a property. However, starting on March 19, 2019, the budget proposes that depending on your situation, you can elect under subsection 45(2) or 45(3) of the Income Tax Act that the deemed disposition that normally arises on a partial change in use of property not apply.

Even if you do not make the election, if you started to use part of your principal residence for rental or business purposes, the CRA usually considers you to have changed the use of that part of your principal residence unless all of the following conditions apply:

Generally, if you do not meet all of the above conditions, you will have a deemed disposition of the portion of property that had the change of use, and immediately after, you will be deemed to have reacquired that portion of property. The proceeds of disposition and the cost of the reacquisition will be equal to the proportionate share of the FMV of the property, determined at that time. Additionally, in the year the partial change in use occurs, you can make a principal residence designation (for the portion of the property that had the change in use), by completing page 2 of Schedule 3, Capital Gains (or Losses) and page 1 of Form T2091 (IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust).

Subsequently, when you actually sell the property you have to take all of the following actions:

For more information, see Real estate, depreciable property, and other properties. You do not have to report any capital gain for the part you used for your principal residence.

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