Key Decisions When Converting
| Decision | Options |
|---|---|
| Tax election | File Section 45(2) election to defer deemed disposition, or don’t file and trigger immediate deemed disposition |
| Lender notification | Notify lender and keep residential mortgage, or refinance to rental mortgage |
| Management | Self-manage or hire a property manager |
| Insurance | Switch from homeowner’s to landlord insurance |
| Tenancy | Long-term rental, short-term rental (Airbnb), or furnished rental |
Tax Implications of Converting
Deemed Disposition
When you convert your primary residence to a rental, CRA considers this a “change of use” — a deemed disposition at fair market value.
| Tax Event | Without Section 45(2) Election | With Section 45(2) Election |
|---|---|---|
| Deemed disposition triggered | On date of conversion | Deferred up to 4 years |
| Capital gains tax owing | If gain exists and PRE is not available | Deferred |
| New cost base established | Fair market value at conversion | Stays at original purchase price (for now) |
| Principal residence exemption | Ends on conversion date | Continues for up to 4 years after move-out |
Section 45(2) Election Explained
| Feature | Details |
|---|---|
| What it does | Allows you to designate the property as your principal residence for up to 4 years after you move out |
| Who it benefits | Anyone who might sell within 4 years, or wants to preserve PRE as long as possible |
| Filing requirement | Elect on your tax return for the year of conversion — no special form needed, just a letter to CRA |
| Key condition | You cannot claim CCA (depreciation) on the property during the election period |
| Can you claim a new principal residence? | No — you cannot designate two properties as your principal residence in the same year |
Capital Gains Example
| Scenario | Without 45(2) | With 45(2) |
|---|---|---|
| Purchase price (2020) | $500,000 | $500,000 |
| Value at conversion (2026) | $700,000 | N/A (no deemed disposition) |
| Sale price (2029) | $800,000 | $800,000 |
| Capital gain | $100,000 ($800K - $700K) | $0 (if sold within 4 years of conversion and PRE covers all years) |
| Taxable capital gain (50%) | $50,000 | $0 |
| Tax owed (33% marginal) | ~$16,500 | $0 |
Mortgage Considerations
Does Your Mortgage Allow Renting?
| Mortgage Type | Can You Rent? |
|---|---|
| Residential mortgage (most) | Must notify lender — may or may not approve |
| Portable mortgage | Usually allows rental with notification |
| Rental/investment property mortgage | Designed for rentals — no issue |
What Happens If You Don’t Tell Your Lender?
| Risk | Consequence |
|---|---|
| Breach of contract | Lender could call the mortgage (demand full repayment) |
| Insurance void | Homeowner’s insurance doesn’t cover rental use — claims could be denied |
| Renewal issues | Lender may discover rental use at renewal and change terms |
Switching to a Rental Mortgage
| Feature | Residential Mortgage | Rental Mortgage |
|---|---|---|
| Interest rate | Standard (e.g., 4.49%) | +0.10–0.25% higher (e.g., 4.59–4.74%) |
| Down payment (if refinancing) | N/A | 20% minimum equity required |
| Qualification | Only your personal income/debts | May include projected rental income |
| CMHC insurance | Available (but not for rentals) | Not available |
Rental Income and Deductible Expenses
Deductible Expenses
| Expense | Deductible? | Notes |
|---|---|---|
| Mortgage interest | ✅ Yes | Only the interest portion, not principal |
| Property tax | ✅ Yes | Full amount |
| Insurance (landlord policy) | ✅ Yes | Full amount |
| Property management fees | ✅ Yes | 8–12% of rental income typically |
| Repairs and maintenance | ✅ Yes | Must be repairs, not improvements |
| Advertising for tenants | ✅ Yes | Full cost |
| Utilities (if landlord pays) | ✅ Yes | Full amount paid |
| Legal and accounting fees | ✅ Yes | Related to rental activity |
| Capital Cost Allowance (CCA) | ⚠️ Optional | Claiming CCA invalidates the Section 45(2) election |
| Renovations/improvements | ❌ No (directly) | Added to cost base, deducted through CCA |
Rental Income Example
| Item | Monthly | Annual |
|---|---|---|
| Rental income | $2,500 | $30,000 |
| Less: mortgage interest | -$1,200 | -$14,400 |
| Less: property tax | -$350 | -$4,200 |
| Less: insurance | -$150 | -$1,800 |
| Less: maintenance | -$200 | -$2,400 |
| Less: property management (10%) | -$250 | -$3,000 |
| Net rental income (taxable) | $350 | $4,200 |
Insurance Changes Required
| Coverage | Homeowner’s Policy | Landlord Policy |
|---|---|---|
| Building coverage | ✅ | ✅ |
| Contents (your items) | ✅ | ❌ (tenant’s responsibility) |
| Liability | $1–2M standard | $2–5M recommended |
| Loss of rental income | ❌ | ✅ (covers lost rent during covered repairs) |
| Tenant damage | ❌ | Optional rider |
| Typical cost | $1,200–$2,400/year | $1,500–$3,500/year |
Step-by-Step Conversion Process
| Step | Action | Timeline |
|---|---|---|
| 1 | Get the property appraised (establishes fair market value at conversion) | Before tenants move in |
| 2 | Decide on 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 a system for rental income tracking and expense tracking | Immediately |
| 9 | Adjust tax installments if needed | If net rental income is significant |
Provincial Landlord-Tenant Considerations
| Province | Standard Lease Required? | Rent Control? | Key Legislation |
|---|---|---|---|
| Ontario | Yes | Yes (buildings occupied before Nov 2018) | Residential Tenancies Act |
| British Columbia | Yes | Yes (annual increase capped) | Residential Tenancy Act |
| Alberta | No | No | Residential Tenancies Act |
| Quebec | Yes (verbal OK but written recommended) | Yes | Civil Code of Quebec |
| Manitoba | Yes | Yes (guideline increase) | Residential Tenancies Act |
| Nova Scotia | Yes | Yes (capped at 3%/year or guideline) | Residential Tenancies Act |
When Converting Makes Sense (and When It Doesn’t)
| ✅ Good Fit | ❌ Poor Fit |
|---|---|
| Relocating temporarily (1–4 years) | Property needs major repairs before renting |
| Property is in a strong rental market | Condo board restricts or prohibits rentals |
| You want to build long-term wealth | Mortgage lender won’t allow rental use |
| Section 45(2) protects your capital gains | You need cash from the sale immediately |
| Rental income covers costs | Property would cash-flow negative significantly |