Short Answer
When you move out of your home and start renting it, CRA treats it as a deemed sale at market value on the conversion date. The Section 45(2) election lets you preserve PRE eligibility for up to four additional years — the most valuable planning tool available when making this transition.
The Change-in-Use at Conversion
Under Section 45(1) of the Income Tax Act, when you change the use of a property from personal (principal residence) to income-producing (rental), CRA deems:
| Deemed event | What CRA considers to have happened |
|---|---|
| Deemed sale | You sold the property at FMV on the conversion date |
| Deemed reacquisition | You immediately repurchased it at the same FMV |
| Capital gain on deemed sale | Gain from purchase price to conversion FMV |
| New ACB for rental | FMV at conversion becomes your new cost base |
Without the PRE, this can mean a large capital gain in the year you convert. If you lived there as a principal residence for all years owned, the PRE shelters the entire deemed gain — but you must still file Form T2091 and Schedule 3 to designate.
Section 45(2) Election: The Most Important Planning Step
| Aspect | Detail |
|---|---|
| What it does | Defers the deemed disposition at conversion — effectively ignores the change-in-use for tax purposes while the election is in effect |
| How long | Up to 4 years (5 years if you moved away for work and CRA grants extension) |
| CCA restriction | You cannot claim CCA on the building while 45(2) is in effect — doing so cancels the election |
| PRE benefit | You can designate the property as PRE for up to 4 years after you stop living there |
| How to file | Letter attached to T1 return for the year of conversion |
Why It Matters: PRE Designation Comparison
| Scenario | If you sell after 3 years as rental |
|---|---|
| No 45(2) election | PRE covers years 1–X you lived there; rental years are taxable |
| 45(2) election filed | PRE covers years 1–X lived there PLUS up to 4 additional rental years |
| If the entire gain accrued while you lived there | Both approaches may result in same tax; election protects future designation options |
Getting the Market Value Right at Conversion
The FMV at conversion is critical — it becomes:
- The capital gain calculation endpoint for PRE purposes (on the period you lived there)
- Your new ACB as a rental property (starting point for future capital gains)
| Documentation method | Reliability |
|---|---|
| Formal appraisal by a designated appraiser (AACI) | Best — most CRA-credible |
| Comparative market analysis from a realtor | Good — acceptable with supporting comps |
| Municipal assessment (MPAC in Ontario, B.C. Assessment) | Weaker — often lags real market |
Get this documented at the time of conversion, not years later when selling. Values are much harder to support retroactively.
CCA Decision at Conversion
| Path | CCA | PRE outcome |
|---|---|---|
| Section 45(2) election + no CCA | No depreciation during rental | Full PRE for up to 4 years post-move-out |
| No election + claim CCA | 4% annual deduction on building | PRE ends at move-out date; rental years taxable |
| No election + no CCA | No depreciation benefit | PRE still ends at move-out date |
For most homeowners renting temporarily (job transfer, sabbatical, relationship change), the Section 45(2) election is superior because PRE value typically exceeds 4 years of CCA on a building.
Exception: Long-term rentals where you have no intention of returning and you expect to sell in a lower-income year may benefit from CCA deferral.
What You Must File at Conversion
| Filing | When |
|---|---|
| Section 45(2) letter | T1 return for the year of conversion |
| No immediate capital gain reporting | Unless you choose not to use the election |
| T2091 (PRE designation) | When you eventually sell the property |
| Schedule 3 | When you sell, to report the capital gain |
Note: If you fail to file the Section 45(2) election for the year of conversion, you may be able to amend the return retroactively with CRA permission, but this becomes increasingly difficult with time.
Converting Back to Personal Use
If you move back in after renting:
| Trigger | Section 45(3) election |
|---|---|
| Second change-in-use | Moving back creates another deemed disposition at current FMV |
| 45(3) election benefit | Defers the deemed disposition; can retroactively designate prior rental years as PRE years (up to 4 years before move-back) |
| CCA recapture | CCA claimed during rental still creates recapture on eventual sale |
| Filing | Letter to CRA on T1 return for the year of move-back |
Common Mistakes
| Mistake | Consequence |
|---|---|
| Failing to file 45(2) election the year you move out | Deemed disposition triggers; cannot easily undo |
| Getting appraisal years after conversion when selling | Hard to substantiate FMV at conversion — CRA may challenge ACB |
| Claiming CCA and thinking the election still applies | Election is cancelled; retroactive deemed disposition applies |
| Not filing T2091 when selling | $100/month penalty up to $8,000; CRA may also challenge PRE claim |
Bottom Line
Converting your home to a rental is one of the most significant tax events in a Canadian homeowner’s life. The Section 45(2) election is almost always worth filing — it preserves PRE eligibility for up to four years, potentially sheltering hundreds of thousands in future capital gains. The only cost is foregoing CCA during the election period. Get an appraisal at conversion date, file the election letter with your return, and talk to a tax professional before making the move.