CRA discusses how to report the principal residence exemption when the residence had been expanded from 1 to 2 duplex units

After an individual acquired a duplex in January 2011, he used the two units for renting to a third party and as his personal residence, respectively. In July 2019 he ceased to rent out the first unit, and appropriated it to his residence. He made a s. 45(3) election respecting his change of use under s. 45(1)(c) from rental to personal use, so that he was deemed to have not disposed of the rental unit. (Prior to the 2019 Budget changes, this election would not have been possible because, in the view of CRA, changing the use of only one unit in a duplex represents only a partial change of use of a single property.)

He then will dispose of the duplex in December 2022.

CRA indicated that notwithstanding that it considered the duplex to be a single property, the principal residence designation on the 2022 disposition should be made on two designation forms – one respecting the smaller unit that had been used as a residence up to the expansion date, and the second for the expanded unit.

As to the making of the s. 45(3) election, CRA stated:

Where an election under subsection 45(3) is made, the taxpayer must inform the CRA by enclosing a duly signed letter to that effect with the taxpayer’s return for the year in which the taxpayer actually disposed of the property, or earlier if the CRA issues a formal demand for that election. In that letter, the taxpayer should provide all relevant information related to the change of use.

Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.3 under s. 54 – principal residence exemption - (c) and s. 43(1).