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Markbo

Making election under paragraph 45(2) - how does that work?

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I rented out my principal residence for a few months in 2015 while I was away for work reasons, so I'd like to make an election under paragraph 45(2) of the income tax act that the property use has not changed. The purpose is that the home remains my principal residence, I don't want to be charged capital gains tax, and I don't want to have to repay the outstanding amount in the Home Buyer's Plan right now.

 

Does anybody know how to do that in Ufile? The rental income pages are pretty clear otherwise.

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If you never sold the home or bought another one in the process, then there is no need to designate anything. Just report the rental income. 

 

Also just make your regular Home Buyer's Plan repayment for the year.

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That would be nice, but CRA told me something different.

 

The correct procedure is to file on paper and to include a note saying that you make an election under subsection 45(2) to maintain the home as principal residence. Then rental income needs to be reported as normal and current expenses (but not capital expenses) can be claimed. The HBP is unaffected in that case, but a change in the use to a rental property could otherwise trigger a treatment as "deemed disposition," which would require immediate repayment of the outstanding amounts under the HBP.

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Hi,

Here's what I got on the CRA website:

https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-1-individuals/folio-3-family-unit-issues/income-tax-folio-s1-f3-c2-principal-residence.html#N10A4E

Complete change in use of a property from income-producing to principal residence

2.54 If a taxpayer has completely changed the use of a property (for which an election under subsection 45(2) is not in force) from income-producing to a principal residence, he or she is deemed by paragraph 45(1)(a) to have disposed of the property (both land and building), and immediately thereafter reacquired it, at fair market value. This deemed disposition can result in a taxable capital gain. The taxpayer may instead defer recognition of the gain to a later year by electing under subsection 45(3) that the above-mentioned deemed disposition and reacquisition under paragraph 45(1)(a) does not apply. This election is made by means of a letter to that effect signed by the taxpayer and filed with the income tax return for the year in which the property is ultimately disposed of (or earlier if a formal demand for the election is issued by the CRA). For e-filers, see the Paper documentation page on the CRA website. Also, subsection 220(3.2), in conjunction with section 600 of the Regulations, provides the authority for the CRA to accept a late-filed subsection 45(3) election. Such a late-filed election may be accepted under certain circumstances. For further particulars on the acceptance of late-filed elections, see the current version of Information Circular IC07-1 .

2.55 Even if a subsection 45(3) election is filed in order to defer recognition of a gain from the change in use of a property from income-producing to principal residence, the net income from the property for the period before the change in use must still be reported. However, for purposes of reporting such net income, it should be noted that an election under subsection 45(3) is not possible if, for any tax year ending after 1984 and on or before the change in use of the property from income-producing to a principal residence, CCA has been allowed in respect of the property to:

  • the taxpayer;
  • the taxpayer’s spouse or common-law partner; or
  • a trust under which the taxpayer or his or her spouse or common-law partner is a beneficiary.

CCA so allowed would cause subsection 45(4) to nullify the subsection 45(3) election.

2.56 Similar to the treatment for a subsection 45(2) election (see ¶2.50 - 2.51), a property can qualify as a taxpayer’s principal residence for up to four tax years prior to a change in use covered by a subsection 45(3) election, in lieu of fulfilling the ordinarily inhabited rule (discussed in ¶2.10  - 2.12) for these years. As in the case of a subsection 45(2) election, residence or deemed residence in Canada during these years is necessary for the full benefit of the principal residence exemption to apply. Furthermore, the rule described in ¶2.13  - 2.14 prevents the designation of more than one property as a principal residence for any particular year by the taxpayer (or, for any particular year after the 1981 tax year, by the taxpayer or any other member of his or her family unit).

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