Renting out your home? The no change of use election might help.

If your home is your principal residence and you’re looking to rent it out, your tax situation would look something like this: When you begin collecting rental income, the use of your property changes.  For tax purposes the property is treated as if it were sold as your principal residence and then purchased again as an investment property.  Since it was originally your principal residence, no taxes will be owning on any appreciation from the time it was purchased (or designated as your principal residence) to the day the use changed.  If you were to leave it as an  investment property, you can deduct the tax on the interest portion of the mortgage.  You can also claim depreciation, known as the capital cost allowance.  On the downside, your rental income is fully taxable.

What if the change is temporary?  Say you know you’re going to be out of town for a year or so, but don’t want to sell your home or deal with the some of the future capital gains that would be incurred by changing the use.  The income tax act addresses this issue in section 45(2).  You can defer the gain for up to 4 years, by writing a letter to the CRA stating what you are doing, siting this part of the income tax act and including it with your tax return.  Here are some of the rules:

-         You need to own the property

-         You must have inhabited it as your principal residence

-         The ‘no change of use election’ is a written letter filed with your tax return, signed by the home owner.  It must be filed the year of the change of use and ever year subsequent.

-         You can elect to ‘not change’ the use for up to 4 years.  If after 4 years, you do not change it back to your principal residence, a deemed disposition will occur at its fair market value and any appreciation from that date going forward will be taxable.

-         You can’t claim the capital cost allowance (deprecation).  To do so voids the election.  You also can’t deduct the interest portion of your mortgage, as you have requested that this not be considered an investment property.

-         If you’ve already begun to rent out your property and want to file the election retroactively, fees will be charged.

-         You must remain a resident of Canada during this period of time.

-         A family can only have one principal residence at any time.  If you own more than one property, only one will qualify as your principal residence during any given period of time.

Subsection 54(1) will let you elect to keep the principal residence status on your home for more than 4 years, if you or your spouse were required to move for work.  For this to take effect, your principal residence has to be a minimum of 40 kms further from your new place of employment than the place to which you re-located.

Please note that this works best if you intend to keep house as your principal residence.  This election doesn’t do away with the gain, rather defers it. Here is a link to the CRA website showing what qualifies as capital cost allowance and how to calculate it for an investment property.

You might also want to read CRA's Changing all your principal residence to a rental or business property