Section 45

Subsection 45(1) - Property with more than one use

Paragraph 45(1)(a)

Commentary

S. 45(1) on its face only applies where there has been a conversion of use of a property use for an income-producing purpose (e.g., as a rental property) to some other use (typically, personal use), or vice versa. Thus, on its face, it does not apply to conversions of inventory to rental or leasing property, or vice versa. However, CAE effectively found that there was a disposition and reacquisition of property on the latter type of change of use of property. (CRA does not follow this aspect of CAE - see 2013-0493811C6 and 2015-0596921E5). Accordingly, the discussion below deals with changes of use of both types. The focus of the discussion is on real estate.

A number of principles (and questions) can be considered to arise from the jurisprudence.

If the entity currently holding real estate that is capital property is the one that develops the property for resale, that real estate will not be considered to be converted to inventory until the time that there is “a clear and unequivocal positive act” evidencing a definite plan to proceed with such development (Roos, applying Peachey, Duthie), i.e., there is a presumption in favour of the status quo of the property retaining its capital property status until such an act has occurred (Bodine).

Examples of when this has been considered to occur:

  • Formal application has been made for subdivision approval for the whole property (Roos, Magilb, see also Jones).
  • Third parties are hired to proceed with detailed plans for the development work (Duthie, IT-218R, para. 12, 2012-0467841E5).

Although, quite unusually, in Hughes, a change in use was found to occur on a preliminary, informal application, the bulk of the deisions suggest that a formal definitive application is required to effect a change of use (assuming that the applicant in fact proceeds to then develop the property).

Where the current owner does not intend to develop the property itself, but instead sells to a third party, there generally should be no conversion of the property to inventory in its hands where, in order to enhance the sales price, it has applied to rezone the property or seek subdivision approval for the property before the transfer of ownership (but otherwise does not engage in significant development work) (Cantor, Mackinnon, Latulippe, 9600785, see also McGuire and Willis).

In principle, in this regard, it should not matter significantly if the sale is a non-arm’s length (NAL) one, e.g., to a partially or fully-owned investee vehicle.

If the NAL (or arm’s length) transferee is acquiring with a view to ultimately developing the property for resale, it likely will have acquired the property on income account even if it takes some time before it commences any development work (Bodine, see also Balstone).

Although most decisions have dealt with the question of whether or when there ws a conversion of capital property to inventory, Kaneff found a deemed disposition and reacquistion of property on a conversion from inventory to capital property. It has been found that an alleged personal use of a rental property will not effect a change of use giving rise to a disposition if such use was brief and temporary (Sidhu). Similarly, taking a property (inventory) out of use was not tantamount to a change of use (Hewlett Packard).

The question of how to apply the above principles in the context of a mixed-use project turns in part on whether the property in question continues to be only one property for ITA purposes when a portion of the property has been allocated to a different use (e.g., condo development) than the property’s initial use. CRA considers that a real estate property is only one property for ITA purposes if it has not been legally severed into more than one property (e.g., 2017-0709161C6 F, 2016-0674831C6 F and 2014-0519981E5 F). However, this position is broadly inconsistent with the statement in Golden that the definition of “property” “would appear to include a contract right” (i.e., “property” includes a part of a contract). Furthermore, a Quebec case (Denis) treated a unit in a triplex as a separate property for taxation purposes notwithstanding the triplex was a single property on title.

There are uncertainties as to how to apply the above principles to a large mixed-use project where initially it is up in the air what the ultimate uses will be, especially If the CRA single-property view is accepted.

Quite likely, there is no “unequivocal act” when a master plan amendment occurs to permit residential uses, without specifying whether they will be rental or condo units

Such an act quite likely is not problematic if the property is subsequently transferred to a NAL vehicle without any significant planning work being done by the vendor (the current owner)

As noted above, substantial planning work will trigger a change of use if carried out by or on behalf of the person who ultimately develops the property. However, it is unclear whether there is a conversion if there is substantial planning work by the current owner before the property’s transfer to the arm’s length or NAL developer if there has not yet been close to a definitive determination that there will be a significant condo or other resale component.

S. 45(1)(c), which produces a deemed disposition of a portion of a property at FMV and a deemed reacquisition of that portion at the same amount based on a change made in the “use regularly made by the taxpayer of the property,” would be difficult to apply to land whose only current “regular” use is as a rental property (or as vacant land, so that there is no current "regular" use). CAE effectively extended the change-of-use rules to situations where there is a change from one type of income-producing use to another, but it is unclear whether this case applies to partial changes of use and, in any event, CRA does not fully accept this decision. Given the resulting possibility that the change of use rules can be considered to apply only on an “all or nothing” basis and the Peachey doctrine that a change of use, in order to be recognized, must be “unequivocal,” a substantial argument can be made that no change-of-use can occur until the allocation between the inventory and rental use of the development property in question has been definitively determined through partition of the property.

Cases

C.A.E. Inc. v. Canada, 2013 DTC 5084 [at 5944], 2013 FCA 92

applied to conversion of depreciable property into inventory

The taxpayer, which leased flight simulators which it had manufactured, subsequently sold those simulators. The Minister denied capital cost allowance claims of the taxpayer made prior to the sales on the grounds that the simulators were inventory.

Noël JA found that as ss. 45(1)(a) and 13(7)(a) applied to conversions of capital property (including depreciable property) from income-producing use into use as inventory (as well as to conversions into personal use), the claiming of capital cost allowance in the initial years was not inconsistent with a subsequent sale of the simulators on income account. (However, two of the simulators nonetheless were inventory in the years they were being leased by the taxpayer as two airlines had options to purchase them.)

Duthie Estate v. The Queen, 95 DTC 5376 (FCTD)

change of use when project manager retained

A change of use for purposes of s. 45(1)(a) from personal-use capital property to real estate inventory occurred in June 1981 at the time the taxpayer made a decision to proceed with the development of the property as a condominium project on the recommendation of a consultant's report and thereupon retained a project manager and instructed it to prepare a master plan for the property and a concept plan for the units. (The development plans later were abandoned with the worsening economy in 1981). Furthermore, there was insufficient evidence that the taxpayer intended to carry on the development business through a corporation rather than directly. Rothstein J. stated (at p. 5382) that "I do not think moving off the land or physical change constitute conditions precedent to a change of use".

Derlago v. The Queen, 88 DTC 6290, [1988] 2 CTC 21 (FCTD)

change of use on start of personal-use occupation

A taxpayer who purchased residential real estate in 1966 with the intention of renting it out until retirement and thereafter using it for his retirement home was deemed to dispose of the property in 1980 when he commenced occupying the property as his retirement home. Since the deemed disposition occurred in 1980, it should be assumed, in the absence of any provision to the contrary that he received the proceeds at the time of disposition.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation/Definition Provisions disposition implied proceeds receipt 96

See Also

Latulippe v. Agence du revenu du Québec, 2019 QCCA 2177

subdividing a rental property to substantially enhance the sales proceeds did not entail conversion to inventory

In December 2006, the three individual taxpayers acquired, for $392,130 and in equal co-ownership, a rental building with eight apartments towards their retirement. However, the co-owner who was responsible for managing the property proposed the property’s sale in the summer of 2011 due to increased family responsibilities. They were advised by a real estate broker that they would receive an enhanced price if they sold the property as eight co-ownership units, which was made possible by entering in January 2012 into an “indivision agreement” at a modest cost. The units were sold in 2012 for a total of $1,065,900 to separate purchasers, which was $200,000 or $300,000 more than would have been realized had the property been sold as a single rental property.

They reported capital gains. The ARQ (but not CRA) reassessed on the basis that the gain that arose after the indivision agreement was business income.

In reversing the Court of Quebec, and in finding that the taxpayers realized capital gains, Rochette JCA noted the absence of any connection between the taxpayers’ employment and real estate, their absence of prior dealings in real estate, their initial intention of generating additional income on retirement and the decision to sell being brought on by the birth of a daughter to one, the low cost in dividing into co-ownership units and the low commercial risk associated with this step, and the sale of all the units occurring within the same year. He stated (at para. 64, TaxInterpretations translation):

[T]he simple fact of wishing to obtain a better price on the sale of the immovable is insufficient for concluding that a taxpayer was engaged in an adventure or concern in the nature of trade; a taxpayer engaging in a project carrying risk or having a commercial character is not necessarily carrying on a business … .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate subdivision of rental property prior to sale of individual units did not detract from capital account treatment 213

Sidhu v. The Queen, 2004 DTC 2540, 2004 TCC 174

must be unequivocal inconsistent use

The taxpayer, who had used a property as a rental property for nine years and then allegedly used the property as a temporary residence before disposing of it at a gain, had failed to meet the burden of proof of satisfying the Court "that it is reasonable to find on the evidence that the occupation of the subject property was an unequivocal use inconsistent with the original use or, at least, that such occupation was not a use reasonably consistent with the original use". Hershfield J. noted (at p. 2545) that "the brief occupation by the owner that follows during a pre-sale period is not necessarily a use that is inconsistent with the prior rental use of the property".

Hewlett Packard (Canada) Ltd. v. The Queen, 2003 DTC 1324 (TCC), rev'd 2004 DTC 6498, 2004 FCA 240

taking assets out of use not sufficient trigger

In October every year the taxpayer acquired a new fleet of automobiles for use by its employees and transferred possession of the previous year's fleet to the vendor (Ford) or to an auctioneer acting for Ford. The Crown alleged that in October (before the taxpayer's October 31 year end) the old fleet had ceased to be used for an income-producing purpose, with a result that there was a deemed disposition thereof. In rejecting the submission, Hershfield J. stated (at p. 1338):

"Taking property out of use should not be a sufficient reason by itself to find that it is no longer part of the income earning process until a positive act putting the property to a different use has commenced .... [S]teps taken to help ensure a more profitable resale of a capital asset does not constitute a change in use."

Willis v. The Queen, 2003 DTC 1081, 2003 TCC 575 (Informal Procedure)

gradual disposition program not indicative of change of use

The taxpayer had acquired seven lots adjacent to their principal residence as a protective greenbelt. Due to a change in their personal circumstances, they later sold five of the lots at a rate of approximately one every two years. Bowman A.C.J. indicated that if the taxpayer had argued that the properties had never lost their quality of capital properties, he would have been hard put to refuse to give effect to that argument. However, the Crown's assumption of fact that there had been a change of use in 1986 had been thoroughly demolished, and the alternative that the property remained capital throughout had not been advanced by either party, so he considered himself bound to accept the admission made by counsel for the taxpayers that there had been a change of use on January 1, 1992 giving rise to a deemed disposition at fair market value.

Roos v. The Queen, 94 DTC 1094 (TCC)

conversion when application for plan of subdivision

The taxpayers acquired a 39-acres parcel of land in 1980 in order that they could use a portin of it (4 acres as it turned out) in their tree nursery business. The land which thus had been acquired as capital property, was converted into inventory in 1986 when they made formal applications to the Ministry of Municipal Affairs and Housing for a plan of subdivision for a particular block of lots. "By this time they are fully committed to proceeding with the subdivision and had progressed far enough that their change of intention was evident from their affirmative acts." (p. 1099) There was no conversion when an informal application respecting subdivision was subitted to the municipality to afford it with an opportunity to provide its views.

Accordingly, there was a deemed disposition of "Phase I" and "Phase II" under s. 45 for the fair market value of those portions on June 12, 1985 and October 14, 1986, respectively - and the taxpayers' income acount gains from their sales of lots in their 1987 to 1989 taxation years were to be computed using the costs thereby established. (The capital gain arising under s. 45(1)(a) on the conversion was statute-barred.)

[Extract from partially deleted case:

"No actual construction work nor any other type of work had been carried out on his property ... In my view, paragraph 45(1)(a) of the Act contemplated in the situation as in the present one a physical change in the use of the property."

Accordingly, no loss was realized when the property later was disposed of for less than its 1981 value.]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit conversion to inventory when fully committed 71

Jones v. MNR, 90 DTC 1849 (TCC)

conversion when retained engineers

Four acres of land which the taxpayer (Mr. Jones) was using for his personal residence were found to have been converted to inventory at the time that he and his neighbour authorized a firm of consulting engineers to proceed with work to develop such land and his neighbour's adjoining land as a residential subdivision (1975) rather than at the time when the neighbour, without the objection of the taxpayer, started pursuing the possibility of such a development occurring (1973).

Taylor TCJ indicated that he considered himself bound to choose as between the two above dates advanced by the parties, but went on to indicate (at p. 1853) that the date “which does commend itself to me” was the date of rezoning in 1974, stating that “it is difficult to imagine that the rezoning of the subject property itself for ‘single family dwellings’ could have been consummated without the express knowledge, consent and cooperation of Mr. Jones… .”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit no conversion when draft plan of subdivision submitted: at time of rezoning at the earliest 319

Administrative Policy

25 September 2015 External T.I. 2015-0596921E5 - Conversion from inventory to capital

no 45(1) on conversion of house inventory to personal use

Do the rules in s. 45(1) apply where a home builder, who initially held a property as inventory, commenced to use it for his personal use, having regard to "2013-0493811C6, which discussed the CRA's views on C.A.E. Inc. v. The Queen, 2013 FCA 92"? CRA responded:

[In] 9335765… the CRA indicated that the rules in subsection 45(1) would not apply where real estate held by an individual as inventory is permanently converted to a capital property that is personal use property ("PUP")… [and] that the treatment of any gain on the ultimate sale of the particular PUP would not give rise to a gain or loss on income account. …

[This] continues to represent the CRA's views.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit no s. 9 income when house converted to personal use is sold 114

26 November 2013 Annual CTF Roundtable, 2013-0493811C6 - Change in use

CAE not followed

Respecting the statements in C.A.E. that the change of use rules apply to the conversion of inventory to depreciable property or vice versa, CRA stated that it did not agree. Among other concerns:

[I]t would be challenging for both taxpayers and the CRA to apply the change in use rules in the manner outlined by the FCA. Reporting requirements and potential tax liability for every change from inventory to (income-earning) capital use, and vice versa, could represent a significant compliance and administrative burden. …

[T]he CRA will not be changing its general position on the change in use rules as currently presented in Interpretation Bulletins IT-102R2 and IT-218R.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(a) CAE not followed 113

29 November 2012 External T.I. 2012-0467841E5 - Capital gain versus income

conversion of vacant land to inventory when development work

CRA confirmed the position in IT-218R, para. 12 that "vacant land used by its owner for the purpose of gaining or producing income (capital property) will be considered to have been converted to inventory at its fair market value at the time when the owner commences or causes the commencement of improvements to the property with a view to selling it."

9 December 2011 External T.I. 2011-0429321E5 F - Changement d'usage

FMV is measured at the time of change of use

For the purpose of computing the capital gain from the deemed disposition of a property (e.g., house) from rental to personal use, or vice versa, does CRA consider the fair market value of the property at the time of the change in use of the property to establish the proceeds of disposition to the taxpayer? CRA responded:

[O]n a deemed disposition under paragraph 45(1)(a), it is necessary to determine the FMV of the property as of the date of the change of use for the purposes of calculating the capital gain that could result from the deemed disposition.

9 December 2011 Internal T.I. 2011-0399641I7 F - Bien agricole admissible et un lotissement

subdivision does not by itself convert capital property to inventory

Respecting the qualified farm property status of a farm lot that was used as to 60% by Ms. X's husband in the course of carrying on market gardening between 1970 and 1977, and that was recently subdivided and then sold by her on a lot-by-lot basis, CRA reiterated its position in IT-218R, para. 24 that “the filing of a subdivision plan and selling lots thereunder does not in itself affect the status of the gain [as a capital gain] notwithstanding that such subdivision may enhance the value of such land.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1.3) - Paragraph 110.6(1.3)(c) - Subparagraph 110.6(1.3)(c)(ii) 5-year “used principally” test was satisfied where a single lot was used 60% in farming 157

21 February 2000 External T.I. 2000-0004915 - FARMLAND-CONV. TO INVENTORY

farmland which subsequently is developed in converted to inventory at the prior time of application for subdivision approval

A farmer owning farmland applies for subdivision, then further develops and sells the lots. At which of these two phases is the land converted to inventory? CRA stated:

Paragraph 24 of IT-218R states that "the filing of a subdivision plan and selling lots thereunder does not in itself affect the status of the gain notwithstanding that such subdivision may enhance the value of such land." That paragraph goes on to state that "where the taxpayer goes beyond mere subdivision of the land into lots and installs improvements such as watermains, sewers or roads, or carries on an extensive advertising campaign to sell the lots, the taxpayer will be considered to have converted the land from capital property into a trading property." …

[W]here a farmer, makes application for subdivision, then subdivides the farmland and proceeds to develop it and sell lots, it is our general view that the farmland would be considered to have been converted into inventory at the time of making application to the relevant authority for approval of a plan to subdivide the land into lots for sale.

29 March 1996 External T.I. 9600785 - FORFEITED DEPOSIT

forfeited deposit from purchaser is capital gain if farm subdivided, and sold without further development proceeding

Taxpayers, who had owned a parcel of land used by them in farming for over 40 years, applied in 1989, for a plan of subdivision, and in 1995, the owners received an Offer to Purchase on the land and a non-refundable deposit of $200,000, which was then forfeited when the prospective purchaser was unable to close.

After referring to IT-218R, CRA stated:

[M]aking application to the relevant authority for approval of a plan to subdivide land into lots is only the first of many events in the development of a subdivision. In our view, the mere subdividing of land, in absence of some of the improvements mentioned in paragraph 24 of IT-218R, does not result in the development of a subdivision as required in paragraph 12 of IT-218R.

… [W]here a property is a capital property, in the absence of plans to proceed with the development of a subdivision, making application to the relevant authority for approval of a plan to subdivide would not, in and by itself, cause the property to be considered as being converted to inventory. Where this is the case, the entire amount of a forfeited deposit would be considered capital in nature … .

… [If] a conversion of the land from a capital property to a trading property has taken place … [t]he taxpayer would have a notional capital gain on the date of conversion which would not be considered to give rise to taxable capital gains until the year in which the lots were actually sold. In addition, an inventory gain on the increase in value of the property between the date of conversion and the date of sale would also be realized at the time of sale.

21 February 1994 External T.I. 5-933576 -

no s. 45 application to conversion of inventory to personal use

Because the application of s. 45(1) is limited to capital property for purposes of the determination of capital gains and losses in accordance with subdivision c, there is no deemed disposition where real estate that is held by an individual is converted from inventory to a personal-use capital property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit 32

8 July 1992 External T.I. 5-920633 -

Where a corporation has acquired vacant land as capital property and not for an income-producing purpose and changes the use of the land by subdividing it into lots and adding services, the exact time of the change in use will be determined in accordance with IT-218R, paragraph 12.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(2) 31

1992 A.P.F.F. Annual Conference, Q. 18 (January - February 1993 Access Letter, p. 57)

conversion when commence to generate income

A taxpayer who acquires vacant land for one use and, at a later date, starts to use it to generate income, will have s. 45(1)(a)(i) apply at the time of the change in use.

19 June 1990 T.I. (November 1990 Access Letter, p. 12, ¶1526)

Where an individual, who had been a full-time farmer, decided to give up farming to work in a different occupation, but retained the farmland and continued to live in the farmhouse, this would not be considered to constitute a change of use for the purposes of s. 45(1).

IT-102R2 "Conversion of property, other than real property, from or to inventory" 22 July 1985

8. Where capital property is converted to inventory, the action of conversion does not constitute a disposition within the meaning of paragraphs 13(21)(c) and 54(c). It is, however, recognized that the ultimate disposition of a property that was so converted may give rise to a gain or loss on capital account, a gain or loss on income account or a gain or loss that is partly capital and partly income. Accordingly, with respect to capital property that has been converted to inventory, taxpayers may calculate capital gains or losses, if any, on the basis that a notional disposition of such property occurred on the date of conversion.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Computation of Profit 106

IT-218R "Profit, Capital Gains and Losses from the Sale of Real Estate, including Farmland and Inherited Land and Conversion of Real Estate from Capital Property to Inventory and Vice Versa" 16 September 19864

10....where real estate is converted from capital property to inventory...for real estate that is used for the purpose of gaining or producing income from a business or property, its conversion to inventory will not constitute a change in use...and the proceeds from its ultimate sale will be treated in accordance with 15 below....

12. Vacant land that is capital property used by its owner for the purpose of gaining or producing income will be considered to have been converted to inventory at the earlier of

(a) the time when the owner commences or causes the commencement of improvements thereto with a view to selling it, and

(b) the time of making application to the relevant authority for approval of a plan to subdivide the land into lots for sale, provided that the taxpayer proceeds with the development of the subdivision.

13. The units in a multi-unit residential apartment, or an office, warehouse storage building or any similar structure that is held as capital property by the owner will be considered to have been converted to inventory at the time when application is made to the relevant authority for approval to change the title to any such building to strata title, provided that the owner proceeds with the sale of the units.

Mere subdivision of faring land into lots does not convert to inventory

24. Parcels of farming or inherited land referred to in 23 above may be difficult to sell en bloc and the land may be sold by subdividing it and selling the lots individually. It is the Department's view that the filing of a subdivision plan and selling lots thereunder does not in itself affect the status of the gain notwithstanding that such subdivision may enhance the value of such land. A gain on the sale of farming or inherited land will remain a capital gain if an examination of all other facts, both before and after subdivision, establishes this to be so. However, where the taxpayer goes beyond mere subdivision of the land into lots and installs improvements such as watermains, sewers or roads, or carries on an extensive advertising campaign to sell the lots, the taxpayer will be considered to have converted the land from a capital property into a trading property. Where such a conversion occurs see 15 above for treatment of gains or losses arising from the ultimate sale of the property

Articles

Harris, "Tax Aspects of Condominium Conversions and Lease Inducement Payments to Recipients", 1986 Conference Report, c.45.

Subparagraph 45(1)(a)(ii)

See Also

Denis v. Agence du revenu du Québec, 2019 QCCQ 6708

taxapyer could not treat alleged prior change of use as stepping up basis

The taxpayer sold a triplex in 2011 at a gain, which he reported as being fully exempt under the Quebec principal residence exemption. The basement unit, which represented 54% of the triplex, had been occupied by him for use as his residence and a home office since his purchase of the triplex in 2002. The two upper units had been rented out by him to third parties until 2007, and he provided unconvincing evidence that thereafter they should be regarded as having been used as part of his principal residence.

In confirming the ARQ’s reassessment made on the basis that only 54% of the taxpayer’s gain was eligible for the principal residence exemption, Breault JCQ stated (at paras. 57, 68 TaxInterpretations translation): Breault JCQ stated:

[I]n order for two housing dwellings or units in the same immovable to be considered a single housing unit for the purposes of TA section 274 (or ITA 54), they must be sufficiently integrated, one with the other, such that the owner can benefit from full enjoyment of the entirety. …

[N]o transformation or modification of much significance was made to the Triplex in order for the three units to be linked in some manner to each other.

The taxpayer made an alternative argument that the upper units, now viewed as separate properties from the basement unit, had undergone a change of use for purposes of the Quebec equivalent of ITA s. 45(1) in 2007, so that their cost had been stepped up to their fair market value on that date. Breault JCQ noted not only that such a change of use had not been established, but that it was inappropriate for the taxpayer to now seek to benefit from a deemed gain and step-up that he had not declared in his 2007 return (para. 125).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence three units in triplex were not integrated and did not form one housing unit 365

Paragraph 45(1)(c)

Administrative Policy

3 February 2017 External T.I. 2015-0589821E5 F - Change of Use of duplex

substantially renovating the personal-use portion of a rental property (without changing floor areas) generally would not engage the change-of-use rules
essentially the same as 2016-0674831C6 F and the same summaries apply

CRA considerd a real estate property that has not been partitioned to be a single property. Thus, for example, if a duplex containing two identical units with unit 1 used for personal purposes and unit 2 being rented out, has a reversal of use, so that unit 1 starts to be rented out and unit 2 to be used for personal purposes, the change of use rules would not apply, because the rental-property use of this single property stays at 50%. When asked what would happen if unit 2 then was substantially renovated so that its relative value increased, CRA stated that this:

would not in itself have the effect of changing the relation between the use regularly made by the taxpayer of the property for gaining or producing income and the use regularly made of the property for other purposes. Our comments would be different if the renovation had the effect of changing the relative area of each unit.

2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.4, 2016-0674831C6 F - Changement d'usage - duplex

substantially renovating the personal-use portion of a rental property (without changing floor areas) generally would not engage the change-of-use rules
essentially the same as 2015-0589821E5 F

An individual acquires a duplex in 2010 consisting of two identical units. The individual occupies the first unit and rents out the second. At the beginning of 2016, he moves into the second unit, and starts renting out the first. Later in 2016, he incurs significant capital expenditures in renovating the second unit. Does 45(1)(c) apply at the beginning of 2016 or as a result of the renovation? CRA responded:

[A]n immovable is normally considered to be a single and sole property unless it is legally subdivided into two or more separate properties. …

[T]he relation between the use regularly made by the taxpayer of the property for gaining or producing income and the use regularly made of the property for other purposes had not changed at that time [of the move]. Therefore, there was no change in use of the property for the purposes of paragraph 45(1)(c) at the beginning of 2016 by reason of the move of the individual. …

[R]enovations by a taxpayer to only one of the two units in a situation such as that described would not in itself have the effect of changing the relation between the use regularly made by the taxpayer of the property for gaining or producing income and the use regularly made of the property for other purposes. Our comments would be different if the renovation had the effect of changing the relative area of each unit.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(a) apportionment of operating expenses of duplex used both personally and for rental income 159
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property duplex is single property 45

S4-F2-C2 - Business Use of Home Expenses

Exception re ancillary use

2.43 ... [I]t is the CRA’s practice not to apply the partial change in use rules and resulting capital gains tax implications if the following conditions are met:

  • the income-producing use is ancillary to the main use of the property as a residence;
  • there is no structural change to the property; and
  • no capital cost allowance is claimed on the property.

S1-F3-C2 - Principal Residence

Application

2.58 The above-mentioned deemed disposition rule applies where the partial change in use of the property is substantial and of a more permanent nature, that is, where there is a structural change. Examples where this occurs are the conversion of the front half of a house into a store, the conversion of a portion of a house into a self-contained domestic establishment for earning rental income (a duplex, triplex, etc.), and alterations to a house to accommodate separate business premises. In these and similar cases, the taxpayer reports the income and may claim the expenses pertaining to the altered portion of the property (that is, a reasonable portion of the expenses relating to the whole property) as well as CCA on such altered portion of the property.

2.59 It is the CRA’s practice not to apply the deemed disposition rule, but rather to consider that the entire property retains its nature as a principal residence, where all of the following conditions are met:

a) the income-producing use is ancillary to the main use of the property as a residence;
b) there is no structural change to the property; and
c) no CCA is claimed on the property.

2.60 These conditions can be met, for example, where a taxpayer carries on a business of caring for children in the home, rents one or more rooms in the home, or has an office or other work space in the home which is used in connection with business or employment. In these and similar cases, the taxpayer reports the income and may claim the expenses (other than CCA) pertaining to the portion of the property used for income-producing purposes. Certain conditions and restrictions are placed on the deductibility of expenses relating to an office or other work space in an individual’s home – see Interpretation Bulletin IT-514, Work Space in Home Expenses (if the income is income from a business) or Interpretation Bulletin IT-352R2, Employee’s Expenses, Including Work Space in Home Expenses. In the event that the taxpayer commences to claim CCA on the portion of the property used for producing income, the deemed disposition rule is applied as of the time at which the income-producing use commenced.

7 October 2016 APFF Roundtable Q. 2, 2016-0652841C6 F - Changement partiel d’usage - immeuble locatif et résidentiel

switch between which triplex units used for personal/family rental or 3rd-party rental did not trigger change of use

For the purposes of the s. 45 change-of-use rules, a child’s occupation of a dwelling is considered as personal use if a below-market rent is paid. 2011-0417471E5 indicated that a duplex which has not been legally divided is a single property for s. 45(1) purposes.

A triplex with an FMV of $300K, $500K and $1,500K at the beginning of Years 1, 11 and 16 (the time of its sale), respectively, consisted: as to 50%, of Unit 1, which had direct personal use until Year 10 inclusive and thereafter was rented; as to 25%, of Unit 2, which was rented until Year 10 inclusive, and thereafter was used personally; and, as to 25%, of Unit 3, which was rented until Year 10 inclusive, and thereafter was occupied by children (paying a low rent).

How does s. 45(1)(c) apply to the changes in use at the beginning of Year 11? CRA responded:

The CRA is of the view that a building is normally considered to be a single property unless it was legally subdivided into two or more separate properties. …

In the described situation, although each of the building's units was subject to a change of use in Year 11, the relation between the use regularly made by the taxpayer of the property for gaining or producing income and the use regularly made of the property for other purposes did not change during the year. Accordingly, there was no change of use of the building for the purposes of paragraph 45(1)(c) in Year 11.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(b) on sale of triplex, individual can claim exemption only for years in which particular units were used personally or by children 387
Tax Topics - Income Tax Act - Section 54 - Principal Residence triplex contained separate housing units 144

7 August 2014 External T.I. 2014-0528841E5 F - Changement à une résidence principale

addition of a door to an exterior wall could be considered a structural change triggering a change of use

A taxpayer renovates the basement of his home by adding a separate door, permitting access from the outside, in order to establish offices there of a wholly-owned corporation. Would there be a deemed disposition under s. 45(1)(c)? CRA responded:

Generally… the CRA [does] not … apply the deemed dispositions rule, where the property is considered to retain its primary residence character, no capital cost allowance (CCA) was claimed … and no structural change was made to the property. … [T]here is a structural change when a taxpayer makes changes to a property to make it more suitable for rental or use in the course of carrying on a business.

…[T]he expansion or addition of an opening to an exterior wall of a building could be considered a structural change.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) taxable benefit if renovations paid for by tenant-corporation increase the FMV of property to owner-shareholder 90
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(5) Reg. 1102(5) not applicable where door added by tenant to basement rental property 173

30 October 2013 External T.I. 2013-0500831E5 F - Frais de bureau à domicile

incidental rental use of home does not result in part disposition

A corporation is using an office in its individual shareholder’s home. , “for the shareholder to be able to deduct expenses for the room in the shareholder’s house used by the corporation, the corporation must pay rent.” What is the impact on the principal residence capital gain exemption should the corporation pay rent to the shareholder? CRA stated:

Despite paragraph 45(1)(c), if the following three conditions are satisfied, the CRA would be of the view that there will be no deemed disposition from a change of use:

1. the property is primarily used as a principal residence and is used only incidentally to produce income;
2. no structural change is made to the property; and
3. no capital cost allowance has been claimed for the portion of the property used to earn income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 8 - Subsection 8(13) inapplicable where corporation uses its individual shareholder's office 69
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose to deduct applicable home expenses, individual shareholder must charge rent to corporation using home office 42

17 April 2013 External T.I. 2013-0475301E5 F - Résidence principale - changement d'usage partiel

ancillary income-producing use requirement may not be met where house basement is rented out

After acquiring a two-storey house, work was done in the basement of the house so that it could be rented out. Does this affect the principal-residence exemption? CRA responded:

[A]n election under subsection 45(2) or (3) cannot be made by a taxpayer where there is a partial change in use of a property. The elections in subsections 45(2) and 45(3) cannot be made in the situation under consideration.

In this case, we are of the view that there is a partial change in use of the part of the house used for another purpose when that part begins to be used in full to earn income. Therefore, subparagraph 45(1)(c)(ii) will apply as indicated in the preceding paragraph.

… That being so, para. 2.59 of the Folio [provides] … that there is no deemed disposition [if]:

a) the income-producing use is ancillary to the main use of the property as a residence;
b) there is no structural change to the property; and
c) no CCA is claimed on the property.

In your situation, it is not clear that … the income-producing use is ancillary to the main use of the property as a residence.

21 February 2012 External T.I. 2011-0417471E5 F - Changement d'usage - paragraphe 45(3)

s. 45(1)(c) applies where 2nd unit in taxpayer-owned duplex changed from rental to personal use

A taxpayer inhabited as a principal residence a unit of a taxpayer-owned duplex and integrates that unit, through major renovations, with the other unit in the duplex that was, before those renovations, rented to third parties.

CRA stated:

An immovable is normally considered to be a single property unless it is legally subdivided into two or more separate properties.

Accordingly:

With respect to the submitted situation … there was a partial change of use of the portion of the duplex used for another purpose at the time that portion began to be used in its entirety for personal purposes. Consequently, subparagraph 45(1)(c)(i) would apply so that, in this situation, the partial change-in-use rule in s. 45(1)(c) would be considered to apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(3) s. 45(3) election not available where 2nd unit in taxpayer-owned duplex changed from rental to personal use 132
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property immovable (including a duplex used 2 different ways) is considered a single property unless subdivided 77

Subsection 45(2) - Election where change of use

See Also

Bullard Estate v. The Queen, 2004 DTC 2717, 2004 TCC 249

Campbell J. found that because the deceased taxpayer did not make a s. 45(2) election in a return for 1990, she was prevented from doing so at a later date due to the wording of s. 45(2) and went on to state (at p. 2724):

"If the Appellant had properly filed an election in 1990, to elect the property for the principal residence exemption, but continued to treat the property as a rental property including a claim for capital cost allowance, I believe the election would be valid but she simply would have been reassessed at some point and prevented from making the rental deductions."

Administrative Policy

11 October 2013 APFF Roundtable, 2013-0495621C6 F - Changement usage - Duplex

duplex a single property

Is a duplex or triplex a single property (subject to the land-building allocation) for purposes of ss. 45(2) and (3)? CRA responded (TaxInterpretations translation):

...If there is a single property under the private law…there is a single property for purposes of section 45.

22 August 2014 External T.I. 2014-0541171E5 - Late 45(2) Election filed by executer

late s. 45(2) election filed by executor

Mr. A rented out his home during his final years in a nursing home. Would CRA accept from his executor a late-filed s. 45(2) election for the home made in Mr. A's final income tax return? CRA stated:

[G]enerally, the fact that an executor late-filed the subsection 45(2) election on behalf of a deceased taxpayer, would not, in and of itself, prevent the CRA from accepting the election. However, a late-filed election accepted by virtue of subsection 220(3.2) of the Act is subject to penalty as set out in subsection 220(3.5).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.2) late s. 45(2) election filed by executor 88

25 September 2013 External T.I. 2013-0485751E5 F - Rescinding 45(2) election by a non-resident

deemed dispositin on 1st day of revocation year triggers s. 116(3) filing

If a non-resident holding Canadian real estate rescinds, in a subsequent taxation year, a s. 45(2) election that was made with respect to the property, when must the application for a s. 116 certificate be made? CRA stated (TaxInterpretations translation):

[w]hen the taxpayer rescinds the election, subsection 45(2) provides that the taxpayer is deemed to have commenced to use the property on the first day of the subsequent year. This deemed use results in a deemed disposition of the property at that time.

In the situation presented, the disposition of the taxable Canadian property occurs on the first day of such subsequent year for which the non-resident rescinds the election previously made under subsection 45(2). The notice to the Minister pursuant to section 116 respecting the disposition of the taxpayer’s taxable Canadian property must be submitted within ... 10 days following the first day of such subsequent year.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 116 - Subsection 116(3) s. 116(3) filing requirement counted from date of deemed disposition under s. 45(2) 103

13 February 2013 Internal T.I. 2012-0448391I7 - Validity of late-filed election and designation

The taxpayer, who sold a duplex to a non-arm's length person, filed his tax return on time without disclosing the disposition, then approximately two years later late-filed an s. 45(2) election. CRA stated:

Since subsection 45(2) is listed in paragraph 600(b) of the Regulations, a subsection 45(2) election can technically be late filed providing the requirements under paragraphs 220(3.2)(a) and (b) of the Act are met. However, [there is a requirement] that no CCA has been claimed on the property since the change in use has occurred....

Based on the legislation and the administrative positions of the CRA, if a late-filed election is required under a prescribed provision and the reason for the taxpayer's request falls under one of the taxpayer relief provisions provided under paragraph 56 of IC07-1, then there is no authority for the CRA to deny the late-filed election.

16 December 2011 External T.I. 2011-0419211E5 F - Choix à 45(2)

devisee of changed-use principal residence cannot benefit from s. 45(2) election by estate in years following testator’s death

Mr. A’s terminal return made a s. 45(2) election respecting a change in use to rental use earlier that year of the principal residence of him and Mrs. A. Mrs. A inherited the property. In finding that the election made by Mr. A's estate did not permit Mrs. A to designate the property as her principal residence, CRA stated:

[The] four-year rule applies only to the taxpayer who owned the property at the time of the change of use and who made the election under subsection 45(2). … Mrs. A will inherit the building, not as a principal residence, but as a rental property.

CRA went on to not that by virtue of ss. 40(4)(a) and 40(4)(b) “Mrs. A may designate the building as her principal residence for all the years for which Mr. A could have done so.”

CRA also discussed the process for rescinding the election.

8 July 1992 External T.I. 5-920633 -

A taxpayer will be allowed to elect under s. 45(2) in relation to a capital property even where it is not a depreciable property subject to the rules contained in s. 13(7)(b).

1992 A.P.F.F. Annual Conference, Q. 18 (January - February 1993 Access Letter, p. 57)

An election may be made under s. 45(2) in respect of capital property which does not constitute depreciable property to which s. 13(7)(b) otherwise would apply.

Subsection 45(3) - Election concerning principal residence

Administrative Policy

11 October 2019 APFF Roundtable Q. 3, 2019-0812621C6 F - Changement d’usage-impact sur l’exemption pour résidence principale

method for making s. 45(3) election where conersion of duplex

After Monsieur 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) (as permitted by the 2019 Budget changes). After referring to the initial residence unit as Unit 2 and the expanded unit as Unit 3, CRA stated:

The taxpayer will therefore have to file two worksheets and two T2091 forms … if the taxpayer wishes to designate Unit 2 and Unit 3 as his principal residence for the applicable years.

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (c) reporting of principal residence exemption when the residence had been expanded from 1 to 2 duplex units 266
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) allocation of ACB between units in a duplex 169

7 October 2016 APFF Financial Strategies and Financial Instruments Roundtable Q. 4, 2016-0651791C6 F - Choix 45(2) et (3) - immeuble à logements

invalidity of s. 45(3) elections on duplex units applied only for changes of use after February 21, 2012

What should an individual do who, a number of years ago, changed the use of a duplex within the potential scope of s. 45(3) election, and is now confronted by the new policy in 2011-0417471E5? CRA responded:

2011-0417471E5 dated February 21, 2012…[indicates] that a building is normally considered to be a single property for the purposes of subsection 45(1)… . Thus, a change of use of a duplex unit is generally a partial change of use within the meaning of paragraph 45(1)(c) and therefore, such a change cannot be the subject of an election under subsection 45(3).

The CRA therefore no longer accepts an election under subsection 45(3) for a change of use referred to in the position taken on February 21, 2012 where this change occurred after that date.

However, the CRA continues to accept an election made under subsection 45(3) after February 21, 2012 for a change of use referred to in the position taken February 21, 2012 where this change of use has been made on or before February 21, 2012 and where it also qualified for this election prior to this position being taken.

13 November 2014 External T.I. 2014-0535611E5 F - Changement d'usage suivi d'un roulement

s. 73(1) transfer does not trigger s. 45(3) deferred gain

After an individual made the s. 45(3) election, the principal residence was transferred on a rollover basis under s. 73(1) to the individual's spouse. Did this trigger the accrued gain which was deferred through the s. 45(3) election? CRA stated (TaxInterpretations translation):

[T]he transfer of the principal residence by the individual to the spouse occurs at the ACB. The realization of the accrued gain, at the time of the change of use, thus would be reported when the spouse disposes of the principal residence.

25 February 2013 Internal T.I. 2012-0440371I7 F - Changement d'usage - Duplex

s. 45(3) election unavailable for partial change of use (duplex going from 50% to 100% personal use)

The Directorate confirmed the position it took in 2011-0417471E5, which it summarized as follows (TaxInterpretations translation):

[T]here is a partial change of use of a duplex for the purposes of paragraph 45(1)(c) ... where an individual lives in as a principal residence a unit of a duplex owned by the individual and, through major renovations, integrates that unit with another duplex unit that was rented to third parties before those major renovations. Since the election under subsection 45(3) ... cannot be made where the change of use of a property is a partial change of use, an individual who is in [this] situation ... cannot make the election under subsection 45(3) ... .

29 November 2012 External T.I. 2012-0433451E5 - Change in Use - Election under 45(3)

In 2007 the taxpayer and his spouse leave their principal residence for new employment and rent out the residence until 2011 without making the s. 45(2) election and without claiming CCA.

As they did not make the s. 45(2) election, there would be a deemed disposition and reacquisition of the residence at fair market value in 2007; and they will be considered to have commenced to use the property for an income-producing purpose in 2007. CRA stated:

In 2011, when the taxpayer and his spouse moved back to their former principal residence, changing its use from income producing to personal use, there would be a change in use again, and if its value had increased in the meantime, a taxable capital gain would arise from the deemed disposition of the property under paragraph 45(1)(a)(iii) of the Act. However, subsection 45(3) of the Act allows a taxpayer to elect to defer the recognition of the capital gain until an actual disposition of the property.

Pursuant to subsections 45(3) and 45(4) of the Act, an election can only be made where a capital property that was acquired by a taxpayer for the purpose of gaining or producing income ceases to be used for that purpose and becomes the "principal residence" of the taxpayer and where no CCA was previously claimed and allowed in respect of the property.

Since no election under subsection 45(2) was filed in 2007, pursuant to paragraph 45(1)(a), the property would be deemed to have been disposed of and reacquired immediately by the taxpayer and his spouse for the purpose of gaining or producing income in 2007. Therefore, on the change in use back to their principal residence in 2011, the taxpayer and his spouse would be able to elect under subsection 45(3) and have their property qualify as a principal residence for the years 2008, 2009 and 2010, providing all the relevant conditions are met.

21 February 2012 External T.I. 2011-0417471E5 F - Changement d'usage - paragraphe 45(3)

s. 45(3) election not available where 2nd unit in taxpayer-owned duplex changed from rental to personal use

Can a taxpayer make the s. 45(3) election where the taxpayer inhabited as a principal residence a unit of a taxpayer-owned duplex and integrates that unit, through major renovations, with the other unit in the duplex that was, before those renovations, rented to third parties? After noting that “An immovable is normally considered to be a single property unless it is legally subdivided into two or more separate properties,” so that in this situation the partial change-in-use rule in s. 45(1)(c) would be considered to apply, CRA stated:

As indicated in paragraph 30 of Interpretation Bulletin IT-120R6, Principal Residence, a taxpayer cannot make an election under subsection 45(3) where the change in use of a property is a partial change in use. The election in subsection 45(3) cannot be made in the situation under consideration.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c) s. 45(1)(c) applies where 2nd unit in taxpayer-owned duplex changed from rental to personal use 121
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property immovable (including a duplex used 2 different ways) is considered a single property unless subdivided 77