Short answer: When you stop living in your home and start renting it out, the Canada Revenue Agency (CRA) normally treats that switch as a sale at fair market value. That “deemed disposition” can create a capital gain and a tax bill even though you never sold the property. Subsection 45(2) of the Income Tax Act lets you elect to avoid that immediate tax hit and keep the property eligible for the principal residence exemption for up to four additional years.
This guide explains exactly how the 45(2) election works, who it helps, the rules you must follow, and how to file it. It is written for Ontario homeowners, landlords, and property investors who want clear, practical information before they make the change. For personalized help, Chrome Accounting assists clients across Ontario with personal tax and rental property planning.
What happens without a 45(2) election
Under subsection 45(1), a full change from personal use to income-producing use is a deemed disposition and immediate reacquisition at fair market value on the day the use changes. Any capital gain that has built up is recognized that year. Years the property was your principal residence can still be sheltered by the principal residence exemption (PRE), but the gain is locked in at that date and a new cost base starts for future years. See the CRA’s official guidance on principal residences and changes in use for the full rules.
How the subsection 45(2) election works
Filing a 45(2) election tells the CRA you are deemed not to have begun using the property to earn income. The effects are:
- No deemed disposition occurs in the year of the change.
- Recognition of any capital gain is deferred until you sell the property or rescind the election.
- Your adjusted cost base does not reset.
- While the election is in force, you may designate the property as your principal residence for up to four additional tax years after you stop living in it, even though it is rented.
You can only designate one property per family unit as a principal residence for any given year. Designating the rented home for the extra years means those years cannot be used for another property.
The four-year limit can be extended indefinitely in a qualifying employer relocation if all of these conditions are met (per CRA Income Tax Folio S1-F3-C2):
- You (or your spouse or common-law partner) live away because the employer requires the relocation.
- You are not related to the employer.
- You return to the original home while still employed by that employer (or before the end of the year following the year employment ends), or you die during the employment.
- The original home is at least 40 kilometres farther from the new workplace than the temporary residence, measured by the shortest public route.
Important restrictions
- You still report net rental income. Mortgage interest, property taxes, insurance, repairs, and other eligible expenses remain deductible. Learn more about reporting rental income on the CRA site.
- No capital cost allowance (CCA) on the building while the election is in force. Claiming CCA revokes the election.
- Residency matters. You (or your spouse/common-law partner) must be a resident or deemed resident of Canada for the years you want to designate the property.
- Each beneficial owner should file their own election.
How to file the 45(2) election
There is no CRA form. Attach a signed letter to the T1 return for the year the change in use occurs. The letter should:
- Identify you (name and SIN) and the property (full address and description).
- State that you elect under subsection 45(2) of the Income Tax Act so that the change-in-use rules do not apply.
- Be signed and dated.
If you file electronically, send the letter separately to your tax centre (or submit it through CRA My Account or Represent a Client where available). The normal deadline is the filing due date for that year’s return — usually April 30 of the following year, or June 15 if you or your spouse were self-employed (tax owing is still due April 30).
Chrome Accounting can prepare the election letter as part of your personal tax filing. Book a consultation to get started.
Late-filed elections
If you miss the deadline, the CRA may accept a late election under its taxpayer-relief provisions, provided the request is made within 10 calendar years after the end of the year the election was originally due. Acceptance is discretionary.
If accepted, the penalty is the lesser of $8,000 and $100 for each complete month from the original due date to the date a satisfactory request is filed.
The CRA’s policy is not to process the late election unless the penalty is paid (you can request a waiver at the same time).
Simple example
You bought a Toronto condo in 2018 for $500,000 and lived in it as your principal residence until 2024, when its fair market value was $750,000. You move out and rent it, filing a 45(2) election.
| Without the election | With the election | |
|---|---|---|
| 2024 deemed disposition | Yes, at $750,000 | No |
| $250,000 gain to date | Recognized in 2024; may be fully or partly sheltered by the PRE for the years you lived there | Deferred until sale |
| Cost base going forward | Resets to $750,000 | Stays at $500,000 |
| Extra PRE years while rented | None | Up to four (2025–2028) |
With the election, you can still designate the condo as your principal residence for up to four more years (2025–2028) while it is rented, provided you do not designate another property for those years and remain a Canadian resident. Any further appreciation during those years can also be sheltered if you designate them. When you eventually sell, the PRE calculation uses the years designated plus one, divided by total years owned.
For what happens on the eventual sale of a property that was not your home for every year, see Selling a Rental Property in Ontario? Here’s How Capital Gains Tax Works.
45(2) vs. 45(3)
| Feature | 45(2) | 45(3) |
|---|---|---|
| Direction | Principal residence → rental | Rental → principal residence |
| Timing of election | With return for year of change | With return for year of actual sale |
| Effect | Defers deemed disposition | Defers deemed disposition |
| PRE extension | Up to 4 years after last occupancy | Up to 4 years before actual occupancy |
| CCA restriction | Cannot claim while election in force | Prior CCA can limit the election |
Details are set out in section 45 of the Income Tax Act.
Partial change in use
Since March 19, 2019, you can also elect under 45(2) for a partial change (for example, converting a basement to a rental unit) so that only the income-producing portion is affected, rather than triggering a deemed disposition on the whole property. Specific conditions apply. Review the CRA principal residence page for the latest guidance.
If the basement unit or the whole home is rented short-term, HST can also come into play — see how an existing HST number can capture an Airbnb.
Common mistakes to avoid
- Forgetting to file the election letter with the correct year’s return.
- Claiming CCA and accidentally revoking the election.
- Designating two properties as principal residences for the same year.
- Assuming the election automatically eliminates all tax — rental income is still taxable.
- Missing the late-election window or failing to pay the required penalty.
FAQ
Does filing a 45(2) election require me to designate the property as my principal residence every year?
No. The election preserves the ability to designate it for up to four additional years. You still choose which property to designate each year for your family unit.
Can both spouses file a 45(2) election on the same property?
Yes, if both are beneficial owners. Each should file their own election.
What if I move back in later?
You can rescind the election or simply stop designating the property. Moving back in does not automatically reverse the rules. A separate 45(3) election may be relevant if the property was previously income-producing.
Is the four-year period automatic?
No. You must still meet the residency and single-property designation rules for each year you want to claim.
Do I need a public accounting licence or special registration to use this?
No. Any Canadian resident who meets the conditions can make the election. Professional advice is recommended because the interaction with the principal residence exemption formula, other properties, and future sales can be complex. Learn more about Chrome Accounting’s personal tax services.
Get the 45(2) election right the first time
Filing the election correctly protects the tax-free treatment of your principal residence and avoids an unexpected tax bill on a change in use. Mistakes with timing, CCA, or designation years can be costly.
Chrome Accounting is a fully virtual Ontario CPA practice that works with homeowners, landlords, and multi-property investors across the province. We handle personal tax returns, rental income reporting, principal residence planning, and the 45(2) election letter so the details are correct from the start. Every file is reviewed by a CPA with Big 4 experience, and we explain the “why” in plain language. Meet the founder, Ali Alsharif, CPA.
If you are converting a home to a rental, have already started renting and are unsure about the election, or want to review how the principal residence exemption will apply when you eventually sell, contact us for a consultation. We reply within one business day and provide a clear, fixed-fee quote before any work begins.
Converting your home to a rental?
Ali Alsharif, CPA, MPAcc — Chrome Accounting. Fully virtual, serving all of Ontario — no office visit required. Send the purchase date, the date you moved out, and an estimate of the value at that date, and we’ll prepare the 45(2) election with your return.
T: +1 289 969 3491 · cpa@chromeaccounting.ca · Connect on LinkedIn
Contact UsThis article is general information only and does not constitute tax advice. The rules are complex and depend on your specific facts, residency, other properties, and timing. Consult a qualified CPA or tax advisor for advice tailored to your situation. Rules referenced are based on the Income Tax Act and CRA published guidance as of the date of publication.