It has been a few busy weeks here at our little home office.  From following all the latest and greatest COVID-19 government measures, reviewing clients’ tax returns, learning to stock hacking, to managing the office renovation, we have not slowed down a bit. 

It hasn’t been easy with the unknown.  I had doubts about renovating our office, when it seems that the entire world is turning to virtual office.  

I had doubts about learning stock hacking, when so many people had seemingly lost money in stock investing. 

I also had doubts about my accounting practice, when our revenue dropped quite a bit in March and April.  

Just like the COVID-19 lockdown, there’s light at the end of the tunnel.  We just need to be patient, and learn to adapt. 

Number of confirmed cases have declined.  Ontario is slowly opening up.  Hopefully we can go golfing in the near future.    

Accounting business has been picking up as well.  Clients are uploading their information to beat the deadline June 1.  😊  Renovation is moving along, kitchen has been installed and some furniture will be delivered by the end of the month.  

There’s light at the end of the tunnel.  

Just need to have some faith.  

Now, onto this week’s topic.

A few of clients moved into their rental properties in 2019.

Some of them are in transition, staying in their rental properties until they got their permanent home. 

Some of them simply decide to move into their rental properties for good. 

You may not be aware, everytime you change the use of a property, whether it is from primary residence to rental property, or from a rental property to primary residence, you are considered to have sold the property at its fair market value.  

You are also considered to have acquire the property for the same amount.  

Fair market value of the property is based on the time of change.  

You can buy a property for $500,000 as a rental property, rent it out for a few years, and then you decide to move in.  

At the time of move in, your property can be valued at $600,000.  

You would have deemed to have disposed your property at $600,000, making a capital gain of $100,000.  

Even though you never sold the property, you might be triggering a capital gain of $100,000 on your tax return. 

If you also claim capital cost allowance on this property to offset some of the rental income previous year, you would also have to add the cumulated capital cost allowance (also known as recapture) as your income, the year you move into the property. 

In some cases, it can trigger an unexpected tax bill. 

Thankfully, CRA allows taxpayer to make an election to defer the capital gain tax until you actually sell the property.  

To qualify for this election, 

  • Cannot claim capital cost allowance on this property for any tax year after 1984 and on or before the day you change its use

This means that, if you have claimed capital cost allowance throughout the years, you cannot defer the capital gain tax.  You will have to report $100K to your income when you move into your rental property.   You will also have to pay tax on recapture of capital cost allowance that you have claimed. 

As a bonus to this election, assuming you qualify, you can also designate this property as your primary residence for up to 4 years before you actually occupy it as your principal residence, assuming you don’t have any other property designated as your primary residence during this 4 previous years. 

What does this mean? 

Let us look at this example. 

You work in Toronto, currently renting a condo, making good money. 

However, Toronto housing prices have skyrocketed and so you venture out and decide to buy a property in your hometown Hamilton as investment property.  

Your family lives in Hamilton, it’s an easy commute for you.   

Maybe one day, you would move back to Hamilton, who knows?

You bought your investment property, converted it to legal secondary suites, and rented it out for 5 years. 

5 years later, you got a job offer in Hamilton.  You decided that it is time to relocate and move to your rental property.  

What is the tax implication?

You would have reported income and expenses incurred on this Hamilton rental property for the 5 years.  

If you claim capital cost allowance on this property, you would have to take the recapture on the capital cost allowance into income the year you move in. 

You would also need to report the capital appreciation on your personal tax return the year that you move in.   

If you did NOT claim any capital cost allowance on this rental property, 

  • There’s no recapture tax – since you have never claimed capital cost allowance on this rental property. 
  • Because you don’t have a primary residence (not a property that you owned) in the previous four years, you can file an election to designate this rental property as your principal residence for up to 4 years before you move in.  
  • You can defer at least one year of capital gain (because you own the rental property for 5 years), and you can also get 4 years of capital gain tax free as a result of the election to be filed. 

Scored!

Even if you already had a primary residence in the previous 4 years, you would still be able to defer the capital gain tax on this rental property in Hamilton until you sell it with this election.  

Planning lessons?

If you have plans to move into a rental property, don’t claim capital cost allowance!

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

8 replies
  1. Sajjad S
    Sajjad S says:

    great tip as always! In your example above, do you recommend appraising the rental property at the end of year 4 to ensure that amount is not taxed on?
    or do you simply take the difference between purchase and sale , and divide by however many years you owned and then not pay tax on the first 4 years?

    Reply
    • Cherry Chan
      Cherry Chan says:

      CRA does require you to take the average approach every time you use primary residence exemption. 🙂

      Reply
  2. Sunil Adalja
    Sunil Adalja says:

    Great tip – thank you. It is very timely as I am moving into my rental on June 1 while we renovate our main house. Can you point out the right tax form to file?

    Reply
    • Cherry Chan
      Cherry Chan says:

      You will need to file an election. The election should be sent in together with your tax return. Good luck!

      Reply
  3. Ben
    Ben says:

    assuming moving into your own rental is a transient situation and you plan to buy a larger house to live in, 2 years afterward, AND you won’t be selling the rental, what are the options then? Would it be possible to “rent” to yourself during this time and avoid CapGains and recapture of CCA? Since family (like Mom & Dad) is in Hamilton, would it be better to take over the family house basement?

    Reply
    • Cherry Chan
      Cherry Chan says:

      It’s very creative. Thanks for the comment.
      Income Tax Act would require a deemed disposition reporting unfortunately, if you have already claimed CCA.

      Reply
  4. Mike Jones
    Mike Jones says:

    If you claim CCA in all five years you own the Hamilton rental property, are you still able to claim the capital gains exemption for the past four years? Or does the capital gains exemption only apply if you haven’t claimed any CCA?

    Reply
    • Cherry Chan
      Cherry Chan says:

      Unfortunately there is a deemed disposition and you will have to report recapture and capital gain on change in use.

      Reply

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