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Discussion Starter #1
Hi There,

I bought my principal residence almost 15 years ago. The price of the property has gone up by 3 times my purchase price. As this was my principal residence, I understand that I won't have to pay capital gain taxes on it if I wish to sell it now. However, I plan to convert this (current principal residence) to a rental property and move to a new property and make that my principal property. My question is, say in 5 years I wish to sell this property (the one I converted from Principal to Rental). Will I only pay capital gain taxes based on the increase from now until the time I sell it (5 years of increase)? If so, how would CRA determine the current market price as of today to calculate the capital gain taxes?
 

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When you convert your principal to a rental property CRA deems that you have disposed of your residence at the Fair Market Value (FMV) on the date it was converted to a rental property. The responsibiltiy is on you to determine the FMV at that time and to report it on your personal tax T1 return. You can establish the FMV yourself using information such as property tax assesments, sales of comparable residences in your area etc. However I would suggest you get a professional appraisal done to ensure the FMV is not understated , that you have good documentation for the cost base for what becomes your rental property and in the event that CRA requests support for your valuation.

This deemed disposition should be reported on the T1 for the year you converted the property. You need to complete the Principal Residence Designation section of Schedule 3 (Capital Gains and Losses) as well as form T2091(IND) (Designation of a Property as a Principal Residence). It is important to file this in the year of conversion to a rental property. This way you ensure you do not pay any tax on the capital gain of your principal residence and you establish the new cost base for it as a rental property. When determining the cost base for your "rental property" it is important to determine the land value and the building value, as only the buidling would be eigible for Capital Cost Allowance (CCA) on your tax return. If you forget report the deemed disposition the CRA will accept a late designation in certain circumstances, but a penalty may apply.

Having said the above three is an election that can be made that you should be aware of.
CRA indicates that:
"When you change your principal residence to an income producing property, such as a rental or business property, you can make an election not to be considered as having started to use your principal residence as a rental or business property. This means you do not have to report any capital gain when you change its use. If you make this election:
  • you have to report the net rental or business income you earn
  • you cannot claim capital cost allowance (CCA) on the property
While your election is in effect, you can designate the property as your principal residence for up to 4 years, even if you do not use your property as your principal residence. However, during those years you have to meet all the following conditions:
  • you do not designate any other property as your principal residence
  • you are a resident or deemed to be a resident of Canada"
"To make this election, attach a letter signed by you to your income tax and benefit return of the year in which the change of use occurs. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply."

This election can be of benefit in some situations, but the limitation of not being able to claim CCA on the rental property could be a significant drawback. If you are considering moving back into the property or selling in a few years it would be advisable to see a tax professional to determine your best course of action.

Attached are pdf's of Schedule 3 and Form T2091 for your info.


 

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I currently live in Ottawa and am in the same situation. I will need to get a professional appraisal in the next few weeks. Does anyone know or recommend one in Ottawa?
 

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Discussion Starter #5
When you convert your principal to a rental property CRA deems that you have disposed of your residence at the Fair Market Value (FMV) on the date it was converted to a rental property. The responsibiltiy is on you to determine the FMV at that time and to report it on your personal tax T1 return. You can establish the FMV yourself using information such as property tax assesments, sales of comparable residences in your area etc. However I would suggest you get a professional appraisal done to ensure the FMV is not understated , that you have good documentation for the cost base for what becomes your rental property and in the event that CRA requests support for your valuation.

This deemed disposition should be reported on the T1 for the year you converted the property. You need to complete the Principal Residence Designation section of Schedule 3 (Capital Gains and Losses) as well as form T2091(IND) (Designation of a Property as a Principal Residence). It is important to file this in the year of conversion to a rental property. This way you ensure you do not pay any tax on the capital gain of your principal residence and you establish the new cost base for it as a rental property. When determining the cost base for your "rental property" it is important to determine the land value and the building value, as only the buidling would be eigible for Capital Cost Allowance (CCA) on your tax return. If you forget report the deemed disposition the CRA will accept a late designation in certain circumstances, but a penalty may apply.

Having said the above three is an election that can be made that you should be aware of.
CRA indicates that:
"When you change your principal residence to an income producing property, such as a rental or business property, you can make an election not to be considered as having started to use your principal residence as a rental or business property. This means you do not have to report any capital gain when you change its use. If you make this election:
  • you have to report the net rental or business income you earn
  • you cannot claim capital cost allowance (CCA) on the property
While your election is in effect, you can designate the property as your principal residence for up to 4 years, even if you do not use your property as your principal residence. However, during those years you have to meet all the following conditions:
  • you do not designate any other property as your principal residence
  • you are a resident or deemed to be a resident of Canada"
"To make this election, attach a letter signed by you to your income tax and benefit return of the year in which the change of use occurs. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply."

This election can be of benefit in some situations, but the limitation of not being able to claim CCA on the rental property could be a significant drawback. If you are considering moving back into the property or selling in a few years it would be advisable to see a tax professional to determine your best course of action.

Attached are pdf's of Schedule 3 and Form T2091 for your info.
Thank you so much for your detailed reply. I really appreciate your help and will take your advice of doing a professional appraisal and will also consult a professional tax accountant when it comes time to do my tax return so that I make sure I complete all the necessary forms correctly.

One more question. If I do the conversion sometime in 2021, then do I have to complete the mentioned forms only when I do my tax returns in 2022?
 

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Yes, if you convert your residence to a rental property in 2021 you report that on your 2022 tax return. It is best to get the appraisal done near the date you convert the property in 2021 so that it is accurate.
 
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