Changing all your principal residence to a rental or business property
When you change your principal residence to an income producing property, such as a rental or business property, you can make an election not to be considered as having started to use your principal residence as a rental or business property. This means you do not have to report any capital gain when you change its use. If you make this election, you cannot claim capital cost allowance (CCA) on the property. Any income in respect of a property, net of applicable expenses, must be reported for tax purposes.
While your election is in effect, you can designate the property as your principal residence for up to four years, even if you do not use your property as your principal residence. However, during those years, you have to meet all the following conditions:
- you do not designate any other property as your principal residence
- you are a resident or deemed to be a resident of Canada
You can extend the four-year limit indefinitely if all of the following conditions are met in addition to the above listed conditions:
- You live away from your principal residence because your employer, or your spouse's or common-law partner's employer wants you to relocate
- You and your spouse or common-law partner are not related to the employer
- You return to your original home while you or your spouse or common-law partner are still with the same employer, or before the end of the year following the year in which this employment ends, or you die during the term of employment
- Your original home is at least 40 kilometres (by the shortest public route) farther than your temporary residence from your, or your spouse's or common-law partner's, new place of employment
If you make this election, there is no immediate effect on your income tax situation when you move back into your residence. However, if you change the use of the property again and do not make this election again, any gain you have from selling the property may be subject to tax.
To make this election, attach a letter signed by you to your income tax and benefit return of the year in which the change of use occurs. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply.
If you started to use your principal residence as a rental or business property in the year, you may want information on how you should report your business or property income. If so, see one of the following guides:
Forms and publications
- Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income
- Guide T4036, Rental Income
- Guide T4037, Capital Gains
- Form T1255, Designation of a Property as a Principal Residence by the Legal Representative of a Deceased Individual
- Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust)
- Form T2091(IND)-WS, Principal Residence Worksheet
- Income Tax Folio S1-F3-C2, Principal Residence
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