What happens for tax purposes when I convert my home to a rental?

Under CRA rules, converting your principal residence to a rental property triggers a change-in-use. CRA treats you as having sold the property at fair market value on the conversion date and immediately reacquired it as a rental — even though no actual sale occurred. If you lived in the home the entire time, the gain on the deemed disposition may be fully sheltered by the principal residence exemption (PRE). If not, a capital gain may be triggered.

What is the Section 45(2) election and should I file it?

Section 45(2) allows you to elect to defer the deemed disposition when converting a principal residence to a rental. With the election, you can still designate the property as your principal residence for up to four additional tax years after you stop living there, even though it is now a rental. The key restriction: you cannot claim CCA on the building while the election is in effect. For most people moving out of their home temporarily, this election is worth filing.

How do I file the Section 45(2) election?

Attach a signed letter to your income tax return for the year in which the change-in-use occurs. The letter should identify the property, state that you are making the election under subsection 45(2) of the Income Tax Act, and describe the nature of the change. You do not use a dedicated CRA form — a written letter attached to the return suffices. Keep a copy for your records.

Can I claim CCA on my converted home?

You can claim CCA on the building once you start using it as a rental — but only if you do not use the Section 45(2) election. Claiming CCA invalidates the election, which means the deemed disposition at the conversion date becomes effective and any capital gain accrued to that point becomes taxable. For most people, the value of preserving the PRE through the election exceeds the value of CCA.

What is the market value used for the deemed disposition?

The fair market value used for the deemed disposition is the property''s value on the specific date you moved out and converted it to a rental. You should obtain a documented estimate — ideally a formal appraisal, or at minimum a comparable market analysis from a real estate agent — at that time. This value becomes your new ACB as a rental property and determines future capital gains.

What if I move back into the rental property?

Converting a rental back to your principal residence triggers a second change-in-use — CRA deems you to have sold and reacquired at fair market value on the date you move back in. The Section 45(3) election can defer this deemed disposition and allow you to retroactively designate the prior rental years as PRE years (up to four years). CCA recapture from the rental period is still triggered on the eventual sale.

Converting Your Primary Residence to a Rental Property in Canada

Short Answer

When you move out of your home and start renting it, CRA treats it as a deemed sale at market value on the conversion date. The Section 45(2) election lets you preserve principal residence exemption eligibility for up to four additional years — the most valuable planning tool available when making this transition.

The Change-in-Use at Conversion

Under Section 45(1) of the Income Tax Act, when you change the use of a property from personal (principal residence) to income-producing (rental), CRA deems:

Deemed event	What CRA considers to have happened
Deemed sale	You sold the property at FMV on the conversion date
Deemed reacquisition	You immediately repurchased it at the same FMV
Capital gain on deemed sale	Gain from purchase price to conversion FMV
New ACB for rental	FMV at conversion becomes your new cost base

Without the PRE, this can mean a large capital gain in the year you convert. If you lived there as a principal residence for all years owned, the PRE shelters the entire deemed gain — but you must still file Form T2091 and Schedule 3 to designate.

Section 45(2) Election: The Most Important Planning Step

Aspect	Detail
What it does	Defers the deemed disposition at conversion — effectively ignores the change-in-use for tax purposes while the election is in effect
How long	Up to 4 years (5 years if you moved away for work and CRA grants extension)
CCA restriction	You cannot claim CCA on the building while 45(2) is in effect — doing so cancels the election
PRE benefit	You can designate the property as PRE for up to 4 years after you stop living there
How to file	Letter attached to T1 return for the year of conversion

Why It Matters: PRE Designation Comparison

Scenario	If you sell after 3 years as rental
No 45(2) election	PRE covers years 1–X you lived there; rental years are taxable
45(2) election filed	PRE covers years 1–X lived there PLUS up to 4 additional rental years
If the entire gain accrued while you lived there	Both approaches may result in same tax; election protects future designation options

Getting the Market Value Right at Conversion

The FMV at conversion is critical — it becomes:

The capital gain calculation endpoint for PRE purposes (on the period you lived there)
Your new ACB as a rental property (starting point for future capital gains)

Documentation method	Reliability
Formal appraisal by a designated appraiser (AACI)	Best — most CRA-credible
Comparative market analysis from a realtor	Good — acceptable with supporting comps
Municipal assessment (MPAC in Ontario, B.C. Assessment)	Weaker — often lags real market

Get this documented at the time of conversion, not years later when selling. Values are much harder to support retroactively.

CCA Decision at Conversion

Path	CCA	PRE outcome
Section 45(2) election + no CCA	No depreciation during rental	Full PRE for up to 4 years post-move-out
No election + claim CCA	4% annual deduction on building	PRE ends at move-out date; rental years taxable
No election + no CCA	No depreciation benefit	PRE still ends at move-out date

For most homeowners renting temporarily (job transfer, sabbatical, relationship change), the Section 45(2) election is superior because PRE value typically exceeds 4 years of CCA on a building.

Exception: Long-term rentals where you have no intention of returning and you expect to sell in a lower-income year may benefit from CCA deferral.

What You Must File at Conversion

Filing	When
Section 45(2) letter	T1 return for the year of conversion
No immediate capital gain reporting	Unless you choose not to use the election
T2091 (PRE designation)	When you eventually sell the property
Schedule 3	When you sell, to report the capital gain

Note: If you fail to file the Section 45(2) election for the year of conversion, you may be able to amend the return retroactively with CRA permission, but this becomes increasingly difficult with time.

Converting Back to Personal Use

If you move back in after renting:

Trigger	Section 45(3) election
Second change-in-use	Moving back creates another deemed disposition at current FMV
45(3) election benefit	Defers the deemed disposition; can retroactively designate prior rental years as PRE years (up to 4 years before move-back)
CCA recapture	CCA claimed during rental still creates recapture on eventual sale
Filing	Letter to CRA on T1 return for the year of move-back

Mortgage considerations when converting

Most residential mortgage contracts include an owner-occupancy clause. Renting without lender approval can breach your mortgage agreement.

Risk of Not Notifying Lender	Consequence
Breach of contract	Lender could call the mortgage (demand full repayment)
Insurance voided	Homeowner’s insurance doesn’t cover rental use
Renewal issues	Lender may discover rental use and change terms

If the lender permits the conversion, the mortgage rate may increase slightly:

Feature	Residential Mortgage	Rental Mortgage
Interest rate	Standard (e.g., 4.49%)	+0.10–0.25% higher
Minimum equity	N/A (existing mortgage)	20% typically required if refinancing
CMHC insurance	Available	Not available for rental properties

Insurance changes required at conversion

Coverage	Homeowner’s Policy	Landlord Policy
Building	✅	✅
Your contents	✅	❌ (tenant’s responsibility)
Liability	$1–2M standard	$2–5M recommended
Loss of rental income	❌	✅
Typical annual cost	$1,200–$2,400	$1,500–$3,500

Switch to a landlord policy before tenants move in — a homeowner’s policy will not pay claims on a rental property.

Deductible rental expenses

Once the property is a rental, the following expenses are deductible against rental income:

Expense	Deductible?	Notes
Mortgage interest	✅	Interest only, not principal
Property tax	✅	Full amount
Landlord insurance	✅	Full amount
Property management fees	✅	Typically 8–12% of rental income
Repairs and maintenance	✅	Must be repairs, not improvements
Advertising for tenants	✅	Full cost
Utilities (if landlord pays)	✅	Full amount paid
Legal and accounting fees	✅	Related to rental activity
CCA (depreciation)	⚠️ Optional	Claiming CCA invalidates the Section 45(2) election
Renovations / improvements	❌ directly	Added to cost base; deducted through CCA

Step-by-step conversion process

Step	Action	When
1	Get the property appraised (establishes FMV at conversion)	Before tenants move in
2	Decide whether to file the Section 45(2) election	Before filing that year’s tax return
3	Notify your mortgage lender	Before renting
4	Switch to landlord insurance	Before tenants move in
5	Ensure property meets provincial rental standards	Before listing
6	Register as a landlord (if required in your municipality)	Before renting
7	Screen tenants and sign a lease	Standard lease per province
8	Set up rental income and expense tracking	Immediately

Common Mistakes

Mistake	Consequence
Failing to file 45(2) election the year you move out	Deemed disposition triggers; cannot easily undo
Getting appraisal years after conversion when selling	Hard to substantiate FMV at conversion — CRA may challenge ACB
Claiming CCA and thinking the election still applies	Election is cancelled; retroactive deemed disposition applies
Not filing T2091 when selling	$100/month penalty up to $8,000; CRA may also challenge PRE claim

Bottom Line

Converting your home to a rental is one of the most significant tax events in a Canadian homeowner’s life. The Section 45(2) election is almost always worth filing — it preserves PRE eligibility for up to four years, potentially sheltering hundreds of thousands in future capital gains. The only cost is foregoing CCA during the election period. Get an appraisal at conversion date, file the election letter with your return, and talk to a tax professional before making the move.

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