[kevin002]

This is my first post on this forum and I'm hoping I can get some advice from you kind folks to clear up my understanding on the below matter. I apologize for the lengthy post in advance.

Some quick facts about my situation:

• I own a condo in Toronto and it has been my principal residence since Nov 2012.
• Due to space limitations, I recently decided to rent a bigger unit in the same condo building and offer my condo for rent. This process has been completed and I will be moving into the new place on May 1st. My tenant will be moving into my condo on May 7th.
• My tenant will be responsible for all utility costs.

Based on the information I have gathered thus far, my understanding is as follows:

• The above actions would trigger a deemed disposition of my condo and if I did nothing else:

• I would need to report the resulting capital gain/loss in the year the change of use (from principal residence to income producing) occurs.
• I would need to report the gain that relates to the years that my condo is not my principal residence.

• However I can defer recognition of the above capital gain/loss by filing an election under subsection 45(2) to deem no change to the use of the property (condo) for 4 years. This would be done via a signed letter to CRA specifying said election and will accompany my 2016 tax return (next year).

QUESTIONS
The questions I have are based on proceeding with the above election under subsection 45(2):

1. When I file my return next year, I want to confirm that I should list my condo as the principal residence for 2016? I'm quite certain that this is the case since I have occupied the condo for part of the year.
2. What about the tax returns for the subsequent 4 years? Do I continue to list my condo as the principal residence (to remain consistent with the election)?
3. I will need to include my rental income as taxable income. Am I correct in understanding that I will be able to treat my condo maintenance fees and property taxes as deductibles against the rental income?
4. Is there a way for me to treat the interest on my mortgage as a deductible?
5. Is there any other important item that I need to be aware of or am missing?

I apologize for the lengthy post and look forward to your advice/tips on the above. Thanks so much in advance.
Kevin

 

[Nerd Investor]

In your specific case, I don't think the election under 45(2) will be necessary (or helpful) for you. You'd want to use the election if there was period of time when the condo was not your principal residence (ex. were you renting it out prior to Nov 2012?) If thus far, it's always been your principal residence, then don't bother deferring the gain as it will be fully sheltered by your principal residence exemption anyway.

1. Yes, 2016 will count as a year that the condo was your principal residence.
2. The election just defers when you have to report the gain on disposition, you don't gain any additional years where it qualifies as your principal residence. As I noted above, the election might not be necessary.
3. Correct, condo fees, maintenance, mortgage interest, small repairs, property taxes etc.
4. As long as there is a link between the mortgage interest and an income producing property, the interest should be deductible. Just don't take out a mortgage or line of credit and use it for personal use.
5. Nothing off the top of my head.

 

[kevin002]

Re:

In your specific case, I don't think the election under 45(2) will be necessary (or helpful) for you. You'd want to use the election if there was period of time when the condo was not your principal residence (ex. were you renting it out prior to Nov 2012?) If thus far, it's always been your principal residence, then don't bother deferring the gain as it will be fully sheltered by your principal residence exemption anyway.

1. Yes, 2016 will count as a year that the condo was your principal residence.
2. The election just defers when you have to report the gain on disposition, you don't gain any additional years where it qualifies as your principal residence. As I noted above, the election might not be necessary.

Thanks for your reply Nerd Investor. I'm a bit unclear about the section I've quoted above from your reply.
I purchased the condo in Nov 2012 so my questions regarding the election were forward looking assuming I rent the condo for the next 4 years (my tenant will be moving in on May 1st of this year). According to my understanding the election would help me designate my condo as a principal residence (rather than income producing) for a maximum of 4 years even though I won't be living in it. So based on this, I thought the PRE would apply as follows if I rented it out for 4 years:
-Nov 2012 to April 2016 (when I lived in the condo)
-May 2016 to Dec 2016 (this is included since I lived in the condo for part of 2016)
-Jan 2017 to Dec 2020 (4 year election)

Unfortunately due to my post count, I'm not able to post links but I'm quoting what I've found on Google:
"The 4 Year Rule
A property owner can designate the property as their principal residence up to 4 years in which it isn’t normally inhabited.
The 4 year maximum doesn’t apply if all of the following conditions are met:
The property wasn’t lived in due to a relocation of employment
The employer isn’t a related party
The property becomes a principal residence during employment or after termination of employment"

I'd appreciate if you could let me know if I've interpreted this incorrectly. And if I have it right, would I have to reflect my condo as the principal residence when filing the tax returns for 2017 - 2020 (in order to reflect the election being in effect)?

Thanks again for your help!