Changing the Use of a Property

What happens when you move into an investment property that you own or, visa-versa, rent out the home you currently live in?

This is called a “Change of Use” by the Canada Revenue Agency as you are changing the use from an investment property to a principle residence or from a principle residence to an investment property. As you probably know, in Canada your principle residence is currently exempt from capital gains tax while an investment property is not.

According to the CRA, every time you change the use of a property, you are considered to have sold the property at its fair market value and to then immediately re-purchased the property for the same amount. In most cased you do not have to pay any capital gains tax owing until you actually sell the property.

Example 1: You purchase a property in 2012 for $400,000 and immediately rent it out. In 2020, you decide to move into the property. Since this will be a change of use and CRA considers that the property has been sold at fair market value, you are required to have the property appraised to know what the fair market value is. If the value in 2020 is $580,000, the capital gain is $180,000 ($580,000-$400,000). As mentioned above, in most cases you will not have to pay the tax immediately, only when you actually sell the property.

Example 2: You purchase a property in 2012 for $400,000 and have lived in it as your principle residence until 2017 when you move in with your significant other and rent out your home. When you moved out of the house you had an evaluation done and the property was valued at $520,000. In 2020 you sell the property for $580,000. The increase in value from the time you rent it out until the time you either move back into it or sell it would be considered a taxable capital gain. So in this case the gain would be $580,000 - $520,000 = $60,000

Of course, you should always consult with a taxation specialist in these matters. They will help you understand the current legislation, allowable deductions and any tax documents that are required by the CRA.