Change in Use

I have started renting out my residence. Are there any tax consequences? 

Yes, there are tax consequences due to the change in use.

Deemed Disposition

Consequently, my tax return for the year of the change, in addition to including rental income and expenses, must also include a deemed disposition at the fair market value of the property (1). According to the Income Tax Act (and the Taxation Act for Quebec), this event has virtually the same effect as a real sale, as the taxpayer is deemed to have disposed of the property and reacquired it immediately after. 

We will need the fair market value, the cost of the property, and the acquisition date. A certified appraiser would be helpful. 

If there is a capital gain, it is declared at that time, but if there is a loss, it is deemed null. However, the principal residence exemption could erase this gain. If the exemption is available, there would be no tax to pay. 

The law stipulates that by starting to rent out our principal residence, we establish the cost of our property equal to the fair market value at the time of the change in use. Therefore, when the property is actually sold, if the fair market value has increased, there would be a taxable capital gain, and this gain could not be erased by the principal residence exemption. This is why there is a “reset.” 

Illustrative example of a deemed disposition scenario outlining the tax implications.

Election

However, I could make an election by sending a letter to the tax authorities indicating my decision(2). Consequently, there would be no deemed disposition at the time of the change in use. The advantage of this election, besides that there is no deemed disposition and therefore no tax at that time, is that it could extend the period of the principal residence exemption by four years.

Assuming I have met all the criteria and sold the said property after 4 years of renting, the capital gain could be reduced to zero even if I did not live in the house during these four years. In contrast, if I had not made this election, the capital gain realized during these four years would be taxable(3). 

Illustrative example of an election scenario outlining the tax implications.

Filing the required documents on time is very important, as late filing penalties will apply. 

Please call me if you have additional questions or want to consult a tax specialist.

Dany Turgeon, M. Tax, CD

This text is for educational purposes only. It aims to inform that certain events create tax obligations and not to exhaustively describe how the rules work or provide tax planning. It is always best to consult a tax specialist.

References & Notes:

1 - Canada Revenue Agency. (2025). Change in use of your property. Retrieved from 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/changes-use.html. Accessed on March 3, 2025.

2 - Revenu Québec. (2023). Capital Gains and Losses [PDF]. Retrieved from https://www.revenuquebec.ca/documents/en/publications/in/IN-120-V%282023-12%29.pdf. Pages 33 and 34. Accessed on March 3, 2025. In fact, in Quebec, the election is automatic if it has been made with the Canada Revenue Agency. However, a letter must still be sent to Revenu Québec.

3 - It is important to meet the criteria, including not claiming any capital cost allowance.