Section 45

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

Paragraph 45(1)(a)

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

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

Land which the taxpayers acquired as capital property for use as a tree nursery was converted into inventory 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)

"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

Five acres of land which the taxpayer 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 the 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).

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

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

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)

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.

Articles

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

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

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

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, ITA subsection 45(2) provides that the taxpayer is deemed to have commenced to use the property [for an income-producing purpose] on the first day of the subsequent year. This deemed use results in a deemed disposition of the property at that moment. …[T]he disposition of the taxable Canadian property occurs on the first day of such subsequent year during [sic, for] which the non-resient rescinds the election previously made under ITA subsection 45(2). The notice to the Minister pursuant to ITA section 116 respecting the disposition…must be submitted within 10 days folowing the disposition, namely within 10 days following the first day of such subsequent year.

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.

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

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

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

...a partial change in use of a duplex for purposes of paragraph 45(1)(c) of the Act occurs when a taxpayer, who has been occupying a duplex unit as principal residence and who owns both duplex units, integrates the second unit (which until then was rented to a third party) into the first through a major renovation. As the election contemplated under subsection 45(3) of the Act cannot be utilized when the change in use of property is partial only, a taxpayer in this situation cannot make the election....

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.