If you’ve either started or stopped renting out your home in the 2021 tax year, you’ll likely need to file a change in use election along with your tax returns this year.
This might sound a bit daunting, especially if you’ve never dealt with one before. But, it’s actually a pretty simple concept. “Change in use” just means that you have changed what you’re using a home for. Usually, this means that you’ve either:
- Lived in a home for a period of time and have moved out and started renting it to someone else, or
- Rented out a home for a period of time and have now moved back in or have friends/family living there rent-free
Basically, you were using the property for one thing (e.g. as your primary place of residence) and now you’re using it for something else (e.g. as a rental unit).
If this applies to you, it’s extremely important that you file an election along with your tax returns to avoid paying a hefty amount of unnecessary tax.
Why do I have to file a change in use election?
When you change the use of a property, the CRA considers you, for tax purposes, to have sold the property at its fair market value and then immediately reacquired the property for the same amount.
This means you would need to report (and pay tax on) any gain resulting from the “sale,” unless you elect otherwise. Filing a change in use election is your way of letting the CRA know that you didn’t actually sell your property and therefore don’t need to pay tax on the “income” that would have come along with the sale.
How do I file a change in use election?
Your change in use election will need to be filed alongside your tax returns. You can attach a signed letter to your income tax and benefit return describing the property and state that you want either subsection 45(2) (if you’re changing the use from principal residence to a rental property) or 45(3) (if you’re changing use from a rental property to your principal residence) of the Income Tax Act to apply. You’ll need to include your property’s fair market value at the time of its change of use.
Your letter might look something like our Sale or Disposition of Primary Residence worksheet.
If you need any help filing a change in use election, we’re here to help! We know it can be complicated and even overwhelming to file tax returns when you’re dealing with more complex tax issues. We’re always happy to be the experts so you don’t have to be.
Get personalized tax support from our expert team.
What if I changed the use of my property in a previous tax year but didn’t file a change in use election?
If you think you needed to file a change in use election in the past but didn’t, it’s not necessarily too late. It’s relatively common for homeowners to miss this step, especially when changing their place of residence to a rental property. Most often, people know they need to report their rental income, but weren’t aware that they also needed to officially elect to change their property to a rental unit.
Reach out to us as soon as possible, and we will do everything we can to help you. We can help you file an election with the CRA retroactively so you don’t get dinged with a ton of extra tax to pay.
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This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation, please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your circumstances.