In the previous blog, we talked about the tax implication on claiming CCA on the rental property and time value for the tax savings. As situations may vary from individuals, all factors should be carefully taken into consideration before a decision is made.
One of the interesting situations is renting out your Principal Residence.
Let’s look at one example, John purchased a condo(his Principal Residence)in downtown Toronto when he started his IT career in 2002. He lived in this nice city until late 2006 and then accepted a great job offer in Vancouver. He decided to rent out the place for better cash flow while he worked in Vancouver. The condo was rented from late 2006 until the end of 2010 when John completed his contract and moved back to his place at the end of 2011.
Can John claim CCA on the rental property during the rental period? What’s the tax implication if he decides to sell his Principal Residence later on?
Here are the analysis:
First,when John rents out the entire condo, the condo has changed from its personal use to an income-generating property, he is deemed to have disposed and re-acquired the condo at fair market value.If there is a gain in this deemed disposition, he can use Principal Residence Exemption to offset the gain.Simple!
Second,can he claim CCA on the rental property? Yes, he can claim CCA to reduce the rental income accordingly and enjoys tax savings while renting out the condo.However,this is not recommended in John’s situation.Here is why:
Once John had claimed CCA on the rental property, likely he would have lost 4 additional years that he is eligible for the Principal Residence Exemption while renting out the condo per Subsection 45(3).If he decides to sell the condo later on, he will pay tax on the gain between 2006 and 2011, which he is not eligible for the Principal Residence Exemption.
What should he do? In order to maintain his eligibility on the Principal Residence Exemption(watch out, it is 4 years max.) while the condo is rented out, John needs to attach the application for 45(2) along with his 2006 T1.
Third,when John decides to come back to Toronto and stay in his condo, a change in use on the property occurs again. This time the property has changed from one income-generating condo to a personal use. What it means, the change triggers a deemed disposition as well. In order to avoid this, John needs to elect under 45(3) to inform the CRA when the property is ultimately sold.
Again, claiming CCA on the rental property or not is complex and you need to consider all factors in your particular situation. Always discuss with your accountant and assess the tax impact carefully.
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