26 September 2025 Internal T.I. 2022-0923881I7 - Subsection 45(3) Election

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: 1) Whether a taxpayer can file an election under subsection 45(3) of the Income Tax Act (“Act”) in a particular year that is subsequent to the year of the property’s change in use (from income producing to a principal residence) without it being considered late filed. 2) Whether a taxpayer can rescind a subsection 45(3) election in a particular situation. 3) Whether a letter received by a particular taxpayer is considered a demand to file as contemplated by paragraph 45(3)(a) of the Act. 4) If the subsection 45(3) election had not yet been filed by the Taxpayer, what would be the latest filing due date for the election in the situation where the Taxpayer died in 2019 (assuming that the rollover under subsection 70(6) does not apply) and the estate or other recipient of the property disposed of the property in 2021.

Position: 1) Yes. 2) No, but it may be possible to have the election revoked with CRA’s permission. 3) Question of fact, but likely no. 4) The filing due date of the deceased's 2019 income tax return.

Reasons: 1) The due date is the earlier of the dates indicated in paragraphs 45(3)(a) and (b). 2) Subsection 45(3) does not provide the ability for a taxpayer to rescind the election. However, permission to revoke may be requested pursuant to subsection 220(3.2). 3) It is expected that a demand to file would include a clear statement the taxpayer must file the election. 4) This is the date that the principal residence designation must be filed.

XXXXXXXXXX									Income Tax Rulings Directorate
										Christina Foggia, CPA, CA
Compliance Programs Branch			            	2022-092388
Canada Revenue Agency				

September 26, 2025

Dear XXXXXXXXXX

Re: Subsection 45(3) election

We are writing in response to your questions concerning the election in subsection 45(3) of the Income Tax Act (“Act”), which is generally available to defer the recognition of a gain that could otherwise arise as a result of the deemed disposition of a taxpayer’s property upon its change in use from income producing to a principal residence.

You provided the following description of a taxpayer’s situation:

• In 2014, a taxpayer (the “Taxpayer”) completely changed the use of a property from income-producing to a principal residence. You indicated that no election under subsection 45(2) of the Act had been in force prior to this time.
• In 2017, the Taxpayer filed an election under subsection 45(3) of the Act with respect to the change in use of the property that occurred in his 2014 taxation year.
• In 2020, the Taxpayer submitted a T1 Adjustment Request to amend his 2014 tax return. The purpose for this amendment was to rescind the subsection 45(3) election that the Taxpayer made in 2017 and to report the capital gain arising from the deemed disposition as a consequence of the change in use that occurred in 2014.

Questions

Based on the above-described situation, you have asked us to respond to the following questions:

1. Whether the Taxpayer can file an election under subsection 45(3) of the Act in his 2017 income tax return (that is, by the filing due date for his 2017 income tax return) for the change in use of the property that occurred in 2014 without it being considered as late filed.

2. Assuming that the subsection 45(3) election can be made in 2017, whether the Taxpayer can rescind this election in his 2020 income tax return, and whether this could be done by means of a letter to that effect signed by the taxpayer and filed with his 2020 income tax return.

3. Whether a particular letter received by the Taxpayer is considered a demand by the Minister for an election (that is a demand to file) as contemplated by paragraph 45(3)(a) of the Act.

4. If the subsection 45(3) election had not yet been filed by the Taxpayer, what would be the latest filing due date for the election in the situation where the Taxpayer died in 2019 (assuming that the rollover under subsection 70(6) does not apply) and the estate or other recipient of the property disposed of the property in 2021.

Our Comments

Generally, if a taxpayer has converted his or her income-producing property to property used for some other purpose (that is, personal use), they are deemed by paragraph 45(1)(a) of the Act to have disposed of the property (both land and building) at fair market value and to have reacquired it immediately thereafter at the same amount. This deemed disposition can result in a taxable capital gain. However, the taxpayer may instead defer recognition of the gain to a later year by electing under subsection 45(3) that the above-mentioned deemed disposition and reacquisition under paragraph 45(1)(a) does not apply. One of the conditions that must be satisfied to be eligible for this election is that the property must become or become part of the principal residence of the taxpayer.

Provided that a taxpayer’s change in use of their property (from an income producing property to a principal residence) is covered by a subsection 45(3) election, a property can qualify as their principal residence for up to four taxation years prior to the change in use, in lieu of fulfilling the ordinarily inhabited rule for these years.

Question 1 – Deadline for a subsection 45(3) election

The legislation in subsection 45(3) of the Act provides in part that, for this provision to apply the taxpayer must elect by notifying the Minister in writing on or before the earlier of (a) the day that is 90 days after a demand by the Minister for an election under this subsection is sent to the taxpayer, and (b) the taxpayer's filing-due date for the taxation year in which the property is actually disposed of by the taxpayer. This would generally also be the time when the taxpayer must file their principal residence designation as required by section 2301 of the Income Tax Regulations (“Regulations”).

Accordingly, in the situation described, if the Taxpayer filed a subsection 45(3) election with his 2017 income tax return (that is, by the filing due date for his 2017 income tax return), it would not be considered a late filed election, since at this time, the taxpayer had not yet disposed of the property. However, had the Taxpayer previously claimed CCA on the property, subsection 45(4) would apply to deny the subsection 45(3) election.

Question 2 – Rescinding a subsection 45(3) election

The legislation in subsection 45(3) of the Act does not provide the ability for a taxpayer to rescind the subsection 45(3) election. However, it is possible for a taxpayer to ask the Minister for permission to revoke the election pursuant to subsection 220(3.2) of the Act, in conjunction with section 600 of the Regulations. A revoked election is deemed by subsection 220(3.3) of the Act to have never been made.

Paragraph 49 of Information Circular IC07-1R1, Taxpayer Relief Provisions (“IC07-1R1”), (footnote 1) states that the CRA will reassess a return for a taxation year to accept a late, amended, or revoked election, even if the normal reassessment period for the return has passed.

The request to revoke an election can be made either electronically or to the taxpayer’s tax centre. The taxpayer must apply for this permission, on or before the day that is ten calendar years after the end of the taxation year or fiscal period when the election was otherwise required to be made. Additional information on how to make this request can be found in IC07-1R1. IC07-1R1 also provides information on the circumstances under which a request to late file, amend, or revoke an election may or may not be accepted by the CRA. It should also be noted that a taxpayer may be liable to a penalty, as calculated under subsection 220(3.5) of the Act if the CRA accepts a late, amended, or revoked election.

However, in the context of a subsection 45(3) election, if the application for the revocation is made prior to the election’s due date then a penalty will not apply. Therefore, in the current scenario, it appears that no penalty would apply if the request to revoke the subsection 45(3) election is accepted since the filing due date for the election had not yet passed.

Question 3 – Demand to file a subsection 45(3) election

The Income Tax Rulings Directorate did not see the letter in question so we cannot confirm whether it is a demand by the Minister for an election under subsection 45(3). Nonetheless, pursuant to your description, given the lack of any explicit instructions in the letter and discussion regarding the deadline to file, it is unlikely to be a demand that is contemplated under paragraph 45(3)(a) of the Act.

Question 4 – Deadline for a subsection 45(3) election on the death of the taxpayer

Where an individual dies, paragraph 70(5)(a) of the Act generally provides that the individual is deemed to have disposed of each capital property immediately before their death and received proceeds of disposition equal to the capital property’s fair market value. As a result, any accrued gain or recapture on the capital property is taxed in the deceased’s final return.

You have asked whether a deemed disposition upon the death of a taxpayer pursuant to subsection 70(5) of the Act constitutes the date that the property is “actually disposed of by the taxpayer” for purposes of establishing the date by which a subsection 45(3) election is required to be filed pursuant to the requirement in paragraph 45(3)(b). In our view, a deemed disposition of the deceased Taxpayer’s property pursuant to subsection 70(5) would be considered an actual disposition of their property for purposes of paragraph 45(3)(b). Accordingly, in the situation described, the filing due date for an election under subsection 45(3) would be the Taxpayer’s filing-due date for their 2019 final income tax return.

To be eligible to designate the property as the Taxpayer’s principal residence for the additional 4 years, the principal residence requirements in section 54 of the Act indicate that the subsection 45(3) election must be made. Accordingly, in the case of a deceased taxpayer, filing the election at the time that the taxpayer’s principal residence designation is also required to be made allows the taxpayer to take advantage of these additional years for purposes of the principal residence exemption.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager
Business and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic07-1/taxpayer-relief-provisions-1r1.html#s45