CHANGING PROPERTY USE & ELECTION OPTIONS TO FILE
Changing part of a principal residence to rental use or changing part to business use is one of the three ways the CRA considers there to be a “change in property use”. The other two ways are changing a business or rental use property to a principle residence and changing an entire principle residence to rental or business use. When there is a change made on the usage it is considered to have been sold and immediately reacquired at the fair market value. There are certain elections that can be chosen to postpone the recording of the disposition until the property is sold.
If there is no capital cost allowance (CCA) deducted on the property, an election under subsection 45(2) of the Income Tax Act can be made when changing from a principal residence to a rental or business property. The election designates the property as your principle residence for up to 4 years even if it is not used as a principle residence. The election under subsection 45(3) of the Income Tax Act can be elected when changing a rental or business property to a principal residence to designate the property as the principle residence up to four years before you actually use it as a principle residence. This election cannot be made if any CCA has been deducted.
For changing part of your principal residence for business or rental generally you will have a “deemed disposition” on the part of the property that had changed use. Then immediately after the change in use, you will have “reacquired” the property portion that has changed. The proceeds will be equal to the proportionate share of the fair market value of the property. When you sell the property, you will have to split the selling price between the different usage parts. The CRA will accept the split based on square feet or rooms if reasonable. Report any capital gain on the portion used for business or rental.
If you would like to learn more about your specific situation or to set up a consultation call Marlies Y Hendricks, CPA at 416-766-3941.
The above information is of a general nature only and should not be relied upon for specific situations. Click here for additional tax services information.