Quick answer. When a Canadian homeowner converts their principal residence to a rental property, CRA treats the change of use as a deemed disposition at fair market value under Income Tax Act section 45(1)(a) — meaning the owner is treated as having sold and immediately repurchased the property, triggering tax on any unrealized capital gain. For a Calgary home purchased for $400,000 that is worth $600,000 at conversion, the deemed disposition would create a $200,000 capital gain (subject to the principal residence exemption for years actually lived in as principal residence). The Section 45(2) election, filed as a signed letter with the tax return for the year of conversion, defers this deemed disposition and extends the principal residence exemption for UP TO 4 YEARS after the conversion — meaning the property retains principal residence exemption treatment during that period even though it is being rented. The election is IRREVOCABLE. The property must NOT be ordinarily inhabited by the owner during the deemed principal residence period. Claiming Capital Cost Allowance (CCA) on the property while the 45(2) election is in effect DISQUALIFIES the election — no CCA claims allowed. Filing: signed letter attached to the T1 return for the year of conversion; no specific CRA form. Quebec residents must additionally file TP-274 with Revenu Québec every year of the election. Missing the election typically means the deemed disposition applies with immediate tax liability. Sources: Income Tax Act s. 45(2), CRA T4055 (Newcomers to Canada) and related guidance, DT Professional Suite tax reference.
The Underlying Rule: Change of Use Triggers Deemed Disposition
Income Tax Act section 45(1)(a) treats a change from principal residence use to income-producing use as a deemed disposition at fair market value. The owner is deemed to have sold the property at FMV on the change-of-use date and immediately reacquired it at FMV as a rental property. Two consequences:
- Capital gain at deemed disposition: FMV at conversion minus adjusted cost base (original purchase price plus improvements). The gain is potentially exempt to the extent the property was principal residence during ownership.
- Adjusted cost base of the rental property going forward: FMV at conversion. This becomes the starting point for future capital gain calculation when the property is eventually sold as a rental.
For a Calgary homeowner who lived in their home for all years of ownership and converts to rental, the principal residence exemption typically shelters most or all of the gain at conversion — but not necessarily going forward, and not future appreciation.
How the 45(2) Election Works
The election, made under ITA section 45(2), does two things:
- Defers the deemed disposition at conversion. No immediate tax on the gain.
- Extends principal residence exemption to the property for UP TO 4 YEARS after conversion, even though the property is being rented.
The effect: for up to 4 years after conversion, the property continues to be treated as principal residence for capital gains purposes. Rental income during the period is still taxable (the election does not shelter rental income) but the eventual capital gain calculation treats those years as PRE years.
The Filing Requirements
There is NO specific CRA form for the 45(2) election. It is made by attaching a signed letter to the T1 return for the year of the change of use. The letter typically includes:
- Taxpayer name and SIN.
- The property address.
- The date of change of use (the date rental use started).
- A statement: 'The taxpayer elects under subsection 45(2) of the Income Tax Act that the property described above be deemed not to have made a change in use from principal residence to income-producing use, effective [date]. The taxpayer confirms that no capital cost allowance will be claimed on the property while the election is in effect.'
- Taxpayer signature and date.
Quebec residents must additionally file Form TP-274 with Revenu Québec every year the election is in effect. This is required by Quebec provincial tax law even when the federal election is made once.
The Restrictions
- The election is IRREVOCABLE. Once filed, you cannot undo it.
- You cannot claim Capital Cost Allowance (CCA) on the property while the election is in effect. Any CCA claim disqualifies the election.
- The property must NOT be 'ordinarily inhabited' by the owner during the deemed principal residence period. If you move back in, the election is disqualified.
- The maximum extension is 4 years. The election does not indefinitely preserve PRE treatment.
- You can only have ONE principal residence per family unit at a time. If you buy a new principal residence while the 45(2) election is in effect on your former home, you must choose which property gets the PRE for each overlapping year.
Common Use Cases
Temporary Job Relocation
An owner accepts a 3-year assignment in Vancouver and rents out their Calgary home during that period. The 45(2) election lets them treat the Calgary home as principal residence during the assignment, preserving the PRE for the eventual sale or return.
Delayed Home Sale
An owner moves to a new principal residence but chooses to rent out the former home for 1-3 years rather than sell immediately (market timing, tenant continuity, or specific personal reasons). The 45(2) election preserves PRE treatment on the former home during the rental period.
Testing the Rental Market
An owner considering converting their home to a permanent rental wants to test the rental market and see if the property performs financially before committing long-term. The 45(2) election preserves flexibility during the test period — if the owner decides to sell within 4 years, PRE treatment is preserved.
The Election Interaction with CCA
Since claiming CCA disqualifies the 45(2) election, owners making the election must forego CCA deductions on the rental property during the election period. For a typical Calgary rental producing modest cash flow, the CCA deduction (typically $6,000-$12,000 in first year at 2% half-year rate on a $340,000 building portion) is a meaningful loss. However, the PRE preservation on eventual sale of a home that has appreciated substantially typically dwarfs the foregone CCA. On a $500,000 principal residence that appreciates to $700,000 during a 4-year rental period, PRE preservation saves potentially $50,000-$100,000 in eventual capital gains tax — vastly more than the $25,000-$40,000 CCA that could have been claimed. Run the specific math with an accountant.
Frequently Asked Questions
Can I move back into my rental property to reset the 4-year period?
Not straightforwardly. Once you move back and re-establish the property as your principal residence, the 45(2) election ends. You cannot re-elect on a subsequent conversion of the same property in a way that extends the total deemed-principal-residence period beyond what the election structure allows. Any specific facts require accountant analysis.
What happens after the 4 years?
The property becomes fully treated as a rental property going forward. Its adjusted cost base for future capital gain purposes is FMV at the end of the election period (year 4). Future appreciation is taxable capital gain when the property is eventually sold.
Can I make the 45(3) election instead?
Section 45(3) is the mirror election for the opposite direction: converting a rental property BACK to principal residence. It similarly defers the deemed disposition. The election can be filed later (does not need to be filed with the T1 for the year of conversion). Consult an accountant to determine which election fits your specific facts.
Do I have to notify CRA when I make the election?
Yes — by attaching the signed letter to the T1 return for the year of change of use. You do not need a separate CRA acknowledgment; the election takes effect when filed.
Does UrbanLease help with 45(2) planning?
UrbanLease's core service is RECA-licensed property management. The 45(2) election is a tax decision made by the owner and their accountant. Once the property is a rental (with or without 45(2) election), UrbanLease provides the operational management under PREP Realty.
Bottom Line
The Section 45(2) election is the tax planning tool for Calgary homeowners converting principal residence to rental use. Filed correctly at the T1 for the year of conversion, it defers deemed disposition and preserves principal residence exemption treatment for up to 4 years. The tradeoff is foregoing CCA during the election period, which for most owners of appreciated principal residences is a favourable trade. Missing the election means immediate deemed disposition tax liability, sometimes tens of thousands of dollars payable in the conversion year. Always file with a qualified accountant's involvement. UrbanLease handles the rental operations after conversion under PREP Realty.
Reviewed 2026-08-02. General information only, not tax advice. The Section 45(2) election involves specific technical requirements and interactions with the principal residence exemption. Consult a qualified Canadian tax professional before making the election.