You must normally report the capital gain resulting from the conversion of your principal residence into rental or business income-producing property in the taxation year in which the change in use occurred.

However, you can elect to defer the capital gain and report it in the taxation year in which you actually disposed of of the property. If you make this election, you can designate the property as your principal residence while you used it to earn income for a period of four years following the year of change in use if the conditions below are met. Note that the four-year period can be extended in some cases (see the note below).

• You were resident in Canada or were deemed resident in Canada.
• Neither you nor a family member designated another property as your principal residence for each of the years in question (for any year after 1981).

Once this election has been made under federal legislation (subsection 45(2) of the federal Income Tax Act), it automatically applies under Québec legislation (section 284 of the Taxation Act). Unless this election has been filed with the CRA, no such election is possible for Québec income tax purposes.

If you make this election with the CRA, 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 taxation of a capital gain to a future taxation year. 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 conversion of rental or business income-producing property into your principal residence in the taxation year in which the change in use occurred.

However, you can elect to defer the capital gain and report it in the taxation year in which you actually disposed of the property. If you make this election, you can designate the property as your principal residence while you used it to earn income for a period of four years preceding the year of change in use. The following conditions must be met:

• You were resident in Canada or were deemed resident in Canada.
• Neither you nor a family member has designated another property as your principal residence for each of the years in question (for any year after 1981).

Once this election has been made under federal legislation (subsection 45(3) of the federal Income Tax Act), it automatically applies under Québec legislation  (section 286.1 of the Taxation Act).

Unless this election has been filed with the CRA, no such election is possible for Québec income tax purposes. Note that this election cannot be made for federal purposes if you have claimed capital cost allowance on the property.

To inform us of your election with the CRA, send us a signed letter no later than:

• the deadline for filing your income tax return for the taxation year in which you actually disposed of the property; or
• 30 days after making the election with the CRA.

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. You must report the recapture in the taxation year in which the change in use took place.