Late 45(2) Election and Selling a Home You Rented Out

How is the gain taxed when you sell a former home you rented out?

It depends on whether a section 45(2) election covers the move-out. With a valid election, the capital gains and CCA rules treat the home as never having become a rental (rent is still reported each year), so there is one gain from purchase to sale, and the principal residence exemption covers the years you designate (choose as your principal residence). Without an election, you were deemed to sell the home at its fair market value the day it became a rental, and to buy it back at that value (Income Tax Act, section 45).

Missed the election? The CRA may accept it late if you ask within ten calendar years after the end of the move-out year and no CCA was claimed since; acceptance is discretionary and a penalty applies (see below).

50% of a capital gain is taxable (Income Tax Act, section 38).

A case is not simple if the election was missed or filed late, capital cost allowance (CCA) was claimed on the rental, the move-out sale was never reported, the family owned another home in the same years, or the home sold for less than its move-out value.

Gather the purchase papers and improvement receipts, the move-out date, evidence of value on that date, every rental return (Form T776) and CCA schedule, any election letter and proof it was sent, and a list of the homes your family owned in each year.

How is the gain worked out if a 45(2) election is in place?

Take the sale price minus the original cost and selling costs, then subtract the exempt share. The exempt share is the gain times one plus the number of years designated, divided by the number of tax years you owned the home. The "one plus" applies only if you were resident in Canada in the year you bought it (Income Tax Act, section 40(2)(b); CRA folio S1-F3-C2).

While the election is in force, the home can be designated for up to four tax years when no one in the family lives there, if you are a Canadian resident and no other family home is designated for those years. An employer relocation that meets section 54.1 can lift the four-year limit (CRA folio S1-F3-C2). Rental years beyond those cannot be designated, so part of the gain becomes taxable. The formula in detail is in Principal residence exemption.

How is the gain worked out if you never made the 45(2) election?

There are two sales. The move-out deemed sale uses the home's value that day as proceeds; the principal residence exemption can usually shelter that gain, but it must be reported for that year. The actual sale uses the move-out value as cost, so the rise after move-out is a capital gain (Income Tax Act, section 45(1); CRA: Principal residence).

The rental years usually cannot be designated, because no election covers them and no family member lived there. Any CCA claimed is recaptured on the sale; see Selling a rental property.

Missed the 45(2) election: can you still file it late?

Possibly. Section 45(2) is on the list of elections the CRA may accept late, if you apply within ten calendar years after the end of the move-out year; after that, it cannot, and the no-election result stands (Income Tax Act, section 220(3.2); Income Tax Regulations, section 600). Acceptance is discretionary. The CRA folio names one condition: no CCA claimed on the property since the change in use (CRA folio S1-F3-C2).

An accepted late election costs a penalty: the lesser of $8,000 and $100 for each complete month from the original due date to the date the CRA has a complete request. The CRA's policy is not to accept the request until the penalty is paid, so send payment with it. The penalty itself can be waived or cancelled under the CRA's general relief power, so ask in the same request if the delay was outside your control (Income Tax Act, section 220(3.5); IC07-1R1, paragraphs 51 to 54).

What the CRA looks at, from its taxpayer relief circular (IC07-1R1, paragraphs 56 to 63):

The request is in writing, through Submit documents in My Account or by mail to your tax centre. Include the signed election letter, the years and dates involved, why it is late, the tax effect if accepted or refused, and revised schedules for any affected year. A request made only when a sale is already under way can look like retroactive tax planning, so the reason for the delay matters.

Can you sell while the CRA is reviewing a late 45(2) election?

Yes. Nothing in the Act holds up the sale, or the sale-year return's due date, while a request is pending. A late election has effect only once the CRA accepts it; it is then deemed made on time, and the CRA can reassess every affected year to reflect it (Income Tax Act, sections 220(3.3) and 220(3.4)).

If the CRA refuses, the move-out deemed sale stands. The move-out year then needs that deemed sale reported and the home designated, and the sale-year gain runs from the move-out value. The CRA does not publish how to file the sale year while a request is pending. Until the CRA accepts, no election exists in law, so a sale-year return filed before the answer reports the gain from the move-out value. If the election is then accepted, the CRA reassesses the affected years to reflect it, with interest on any balance owed (IC07-1R1, paragraph 50).

Does claiming CCA on the rental cancel the 45(2) election?

Yes. Claiming CCA on the property is treated as rescinding (cancelling) the election on the first day of the year of the claim, which triggers a deemed sale at fair market value that day. CCA should not be claimed for years the election covers, and a late election is accepted only if no CCA was claimed since the change (CRA folio S1-F3-C2, paragraphs 2.48 to 2.51).

The folio does not say whether amending past returns to remove CCA restores eligibility for a late election. Treat that as unsettled. CCA claims and classes are covered in Capital cost allowance.

Never reported the deemed sale when you moved out: how do you fix that year?

Ask the CRA to amend the move-out year's return to report the deemed sale and designate the home on Form T2091(IND). The CRA accepts a late designation in some cases, and a penalty may apply (CRA: Principal residence).

A principal residence designation counts as an election for the late-filing rules, so the same ten-year limit and the same penalty of up to $8,000 apply (Income Tax Act, sections 220(3.21) and 220(3.5)). If the exemption does not cover the whole move-out gain, tax and interest are owed for that year too. An unreported sale of real property, including this deemed sale, leaves that year open to reassessment past the normal three-year period until you report it on the CRA's amending form, and for three years after that (Income Tax Act, section 152(4)(b.3)). Moved out before 2016? The CRA did not require reporting when the exemption fully covered the gain (CRA folio S1-F3-C2, paragraph 2.15.2). If a late 45(2) election is accepted instead, there is no move-out deemed sale to report.

How do you value the home on the day it became a rental, years later?

Use fair market value on the move-out date: usually the highest price an independent, willing buyer and seller would agree on in an open market (CRA: Definitions for capital gains). The CRA expects you to keep a record of the value on the date you change a property's use (CRA: Guide T4037).

If no record was made at the time, build one as of that date: a written appraisal dated back to the move-out day, sales of similar nearby homes around then, and the listing or rent history of the home itself. The move-out value fixes the exempt gain and the new cost, so the CRA can question it. Missing records can also sink a late election request (IC07-1R1, paragraph 57).

Sold for less than its value when you started renting it: is the loss deductible?

Without an election, possibly. After the deemed sale, the home was held to earn rent, so a drop below the move-out value is a loss on a rental property, not on a home. How the land and building parts are deducted is in Selling a rental property.

With an election in force, the answer is unclear. A loss on personal-use property, such as your own home, is deemed nil (Income Tax Act, section 40(2)(g)(iii); section 54). Section 45(2)(a) deems the home never to have started earning income, which points toward that rule applying, but the CRA folio does not settle the question. A drop in value before move-out is a loss on your home, which is not deductible (CRA: Principal residence).

Bought a new home when you moved out: is a 45(2) election still worth anything?

It can be; compare both results. Your family can designate only one home per year, so the rental years usually go to the new home, not the former one (Income Tax Act, section 54). Even so, the election defers the move-out deemed sale, and the "one plus" in the formula can shelter one extra year of the whole gain.

Which result is lower depends on how the value moved. Without the election, the taxable part is the rise after move-out; with it, the taxable part is a share of the whole gain set by the undesignated years. Work out both with your actual numbers. The election itself is due with the move-out year's return; the years are designated only at sale (CRA folio S1-F3-C2).

Can you cancel a 45(2) election you made?

Yes. You rescind it in your return for a later year, and you are then deemed to start renting the home on the first day of that year. That causes a deemed sale at fair market value that day, reported that year, with the value becoming the new cost (Income Tax Act, section 45(2)(c)). Claiming CCA has the same effect (CRA folio S1-F3-C2).

Which forms report the sale of a former home that was rented?

Schedule 3 and Form T2091(IND), the principal residence designation, for every sale or deemed sale, even a fully exempt one (CRA: Principal residence; CRA: Form T2091(IND)).

Mortgage interest while rented is in Interest deductibility.

Example

Illustrative amounts in Canadian dollars, before selling costs. Each assumes a Canadian resident who owned the condo during 8 tax years.

Valid election, no other home

A condo bought for C$300,000 is lived in for 5 years, then rented for 3 under a valid 45(2) election with no CCA. It sells for C$500,000. All 8 years can be designated, since the 3 rental years fit within the four-year limit. The C$200,000 gain can be fully exempt; the sale is still reported on Schedule 3 and T2091(IND).

Valid election, new house bought at move-out

Same condo, but the family bought a house at move-out and designates the house for the 3 rental years. The condo gets 5 designated years. Exempt share: (1 + 5) / 8 × C$200,000 = C$150,000. Capital gain: C$50,000.

No election

Same condo, no election, worth C$420,000 at move-out. Move-out year: a C$120,000 deemed gain, exempt if designated, but it must be reported that year. Sale year: C$500,000 − C$420,000 = C$80,000 capital gain, plus recapture of CCA if any was claimed. If the move-out year was never reported, it is amended with a late designation. If the CRA accepts a complete request made 5 years after the due date, the penalty is 60 months × C$100 = C$6,000.

Different for you?

• You are moving out now, moving back in, or live in Quebec: see Turning a home into a rental.
• Two homes compete for the same years, or you rented only part of the home: see Principal residence exemption.
• You claimed CCA, or need recapture, the land and building split or a reserve: see Selling a rental property and Capital cost allowance.
• You owned the home less than 365 days: see Property flipping and assignment sales.
• You live outside Canada when you sell: see Non-residents selling Canadian property.
• A family member is on title, or you transferred the home: see Transferring property to family.
• The election was missed, the move-out sale was never reported, or a late request is pending at sale: these turn on CRA discretion, a penalty and a ten-year limit. Gather the records above for individual tax help.