Renting Out a Residence
A change in use occurs if you convert all or part of your principal residence into property used to earn rental or business income or, conversely, if you start using income-producing property as your principal residence.
You are considered to have disposed of all or part of the property at the time of the change in use for proceeds equal to its fair market value (FMV), and to have reacquired the property immediately thereafter at a cost equal to its FMV.
The change in use is considered a deemed disposition, which can result in a capital gain you must normally report for the taxation year in which the change in use occurred.
When you report the capital gain resulting from the conversion of your residence to income-producing property in the taxation year in which the change in use occurred, you can avoid having all or part of the capital gain deemed to be a taxable capital gain by electing to designate the property as your principal residence for one or more years.
However, under subsection 45(2) of the federal Income Tax Act, you can elect to defer reporting the capital gain to the taxation year in which you actually disposed of (sold, transferred, exchanged, gave, etc.) the property. Once this election has been made under federal legislation, it automatically applies under Québec legislation.
If you make this election, you must inform us in a signed letter enclosed with your income tax return for the taxation year in which the change of use takes place. The letter must contain the following information:
- a description of the property concerned by the change in use;
- the details (including the date) of the change in use (for example, you rented out 60% of your residence);
- a statement that you are making an election under subsection 45(2) of the federal Income Tax Act (section 284 of the Taxation Act).
Note that you can only make the election to defer the taxation of a capital gain. Once you start using your residence to earn income, you must report that income. However, you cannot claim capital cost allowance for the part of your residence that the change in use concerns.
You must normally report the capital gain resulting from the change in use of income-producing property in the taxation year in which the change in use occurred.
However, under subsection 45(3) of the federal Income Tax Act, you can elect to defer reporting the capital gain to the taxation year in which you actually disposed of (sold, transferred, exchanged, gave, etc.) the property. Once this election has been made under federal legislation, it automatically applies under Québec legislation.
If you make this election, send us a signed letter by the earliest of the following dates:
- 90 days after the Minister asked you to make the election;
- the deadline for filing your income tax return for the taxation year in which you actually disposed of the property.
The letter must contain the following information:
- a description of the property concerned by the change in use;
- the details (including the date) of the change in use (for example, you converted 55% of a property you used to earn business income into your principal residence);
- a statement that you are making an election under subsection 45(3) of the federal Income Tax Act (section 286.1 of the Taxation Act).
Note that even if you make the election to defer the taxation of a capital gain, you must report a recapture of capital cost allowance that could result from the change in use in the taxation year in which the change in use took place.
If you elect to defer reporting a capital gain to the taxation year in which you actually dispose of the property, you must send us proof that you first made the election with the Canada Revenue Agency (CRA).
See Elections filed with the Canada Revenue Agency (CRA) at Penalty for Failure to File for information about the deadlines for sending us a copy of the documents you sent the CRA and the late-filing penalties.
Designating property as a principal residence while using it to earn income
As a rule, you can designate property as your principal residence only for a year in which you owned the property and used it as housing.
However, if you convert your principal residence into income-producing property (or you convert income-producing property into your principal residence) and you elect to defer reporting the capital gain resulting from this change in use to the taxation year in which you actually dispose of the property, you can then also elect to designate the property as your principal residence for a certain period while you use it to earn income.
The period during which you can designate property as your principal residence, in the taxation year in which you actually disposed of the property, cannot exceed:
- four years after the property's change in use (or more than four years in certain circumstances) if you converted your principal residence into income-producing property;
- four years before the change in use if you converted income-producing property into your principal residence.
Rental not resulting in a change in use
As a rule, renting out part of your principal residence results in a change in use.
However, in some situations you can rent out part of your residence without causing a change in use. You can then designate the property as your principal residence while it is being rented.
For example, you can rent out one or two rooms in your residence. In this case, you must include the rental income in your total income but cannot claim capital cost allowance for the rented portion.
You can also occasionally rent out rooms (during an annual festival, for example) without having to include the rental income in your total income, provided the following two conditions are met:
- Rooms are not rented for more than 20 days in the same year.
- You have no other income from the rental of rooms.
For more information concerning changes in use, see the guide Capital Gains and Losses (IN-120-V).