Change in use — converting your home to rental (or back)
Change in use
Section 45 deems a disposition whenever property changes from income-producing use to personal use or vice versa, triggering capital gains or loss recognition at fair market value at the time of the change.
Plain-language explanation
Section 45 addresses what happens when you change how you use a property — most commonly when you start renting out your home or when you move back into a rental property.
Deemed disposition on change from personal to income use: When you convert your principal residence to a rental property, you are deemed to have disposed of it at FMV at the date of conversion. Any accrued gain to that date is crystallized. However, if you have designated the property as your principal residence for all years you owned it up to conversion, the gain may be fully sheltered.
Deemed disposition on change from income to personal use: When you move back into your rental property, s.45(1) again deems a disposition at FMV. The accrued gain during the rental period is triggered.
The s.45(2) election — "stop-the-clock" for rentals: You can elect under s.45(2) to be deemed NOT to have changed the use. The property is treated as your principal residence for up to 4 years while rented out. This allows you to rent without triggering a deemed disposition — but you must not claim CCA on the property, or the election is revoked.
The s.45(3) election — moving back in: When you move back into a property that was a rental, you can elect under s.45(3) to designate the property as your principal residence retroactively for up to 4 years during which it was rented out.
Example
Nadia bought her condo in 2015 for $400,000. In 2022, she moves out and starts renting it (FMV: $700,000). Without the s.45(2) election, she has a $300,000 capital gain in 2022. With the election, she defers the gain and can designate the condo as her principal residence for up to 4 more years.
Amendment history
Significant changes to this provision. Older versions help you understand rules that applied in prior tax years.
CRA clarified that the s.45(2) election must be filed with the tax return for the year of conversion and is now tracked by CRA alongside the principal residence designation. Late-filed elections are accepted with penalty.
Before
Election timing requirements were loosely enforced
After
S.45(2) election must be filed with tax return; late elections accepted only with taxpayer relief application
Common questions
Do I pay tax when I start renting my home? +
Potentially. Converting your home to a rental triggers a deemed disposition at FMV under s.45(1). If you've claimed the full principal residence exemption, the gain to conversion date is sheltered. If not, you may have tax. You can defer the gain using the s.45(2) election (treats the property as still personal for up to 4 years).
What is the s.45(2) election? +
An election to treat the change-in-use as not having occurred. It allows the property to remain your principal residence for up to 4 additional years while it is actually rented out. You must file the election with your tax return in the year of the change. You cannot claim CCA on the property while the election is in effect.
Can I claim CCA on my rental property? +
You can, but claiming CCA on a principal residence (even while rented) revokes any s.45(2) election in effect, triggering the deemed disposition at the time of the CCA claim. Most owners of properties they plan to live in again choose NOT to claim CCA to preserve the principal residence exemption.
Key terms
Related sections
Related calculators
Related guides
Source: Income Tax Act, RSC 1985, c. 1 (5th Supp.), section 45. — Read the official text on Justice Canada
These summaries are for educational purposes only and do not constitute legal or tax advice. Speak with a CPA for advice on your specific situation.