Change of Use Rules
The change of use rules for Canadian real estate: deemed sales, the two elections, partial changes and valuation.
The short version
- When you change how you use a property, from personal to income-earning or the reverse, the Income Tax Act treats you as having sold it and bought it back at fair market value on that day.
- The deemed sale can create a capital gain (and recapture of capital cost allowance) with no cash coming in, unless the principal residence exemption covers it or an election defers it.
- Two elections help: subsection 45(2) when a home becomes a rental, and subsection 45(3) when a rental becomes your home (if no CCA was claimed). Neither applies to a partial change.
- Small changes usually don't count: renting a room or basement, or a home office, generally isn't a change in use if it's minor, involves no structural changes and you claim no CCA.
- Every change in use should be reported in the year it happens, with a supportable market value.
Change of Use Rules for Real Estate
Most tax events involve a buyer. Change of use doesn't. You keep the keys, the mortgage and the furniture, and CRA still writes up a sale, because the property stopped being one kind of asset and became another. It's the rule that surprises people most in Canadian real estate tax, usually several years after it happened. This page is the map; the two most common directions have their own pages.
The Four Common Changes
| Change | Deemed sale? | Relief | Details |
|---|---|---|---|
| Your home becomes a rental | Yes, at market value | Gain to date usually covered by the principal residence exemption; or elect under 45(2) to defer and keep designating up to 4 years | Home to rental |
| A rental becomes your home | Yes, at market value | Elect under 45(3) to defer, if no CCA was claimed | Rental to home |
| Part of the home becomes a rental or business space | Only if more than minor | None if ancillary, no structural change, no CCA; otherwise a partial deemed sale, no elections | Below |
| A cottage or second property becomes a rental, or the reverse | Yes, at market value | Principal residence exemption only for years designated; 45(2) or 45(3) may apply | Principal residence exemption |
Changed how you use a property?
Describe the property, the dates and how it was used before and after. The SmartFile tells you whether a deemed sale happened, whether an election helps, and what to report for that year.
Partial Changes in Use
CRA generally doesn't treat part of a home as sold when you start renting out a room or basement, or start using part of it for business, if all three are true:
- The income use is ancillary to the main use as your home.
- There are no structural changes to the property.
- No CCA is claimed on that part.
Break those, for example by converting the house into a legal duplex and renting one unit, and you have a partial change in use: the converted part is treated as sold at market value, and the 45(2) and 45(3) elections aren't available for it. For renting part of your home, see Airbnb taxes and rental income tax; for a business at home, home office expenses.
Valuing the Property on the Change Date
The deemed sale is at fair market value, and you'll rely on that number twice: for any gain now, and as your new cost later. Get support at the time: a written appraisal is best; a realtor's comparable-sales opinion is the minimum. Reconstructing a value five years later, when CRA asks, is harder and less convincing.
Why It Matters: Two Scenarios
| Scenario | Result |
|---|---|
| You rent out the home you lived in for 10 years, no election, and sell 3 years later | Gain to the change date is tax-free; gain over the 3 rental years is a taxable capital gain, plus recapture if you claimed CCA |
| You move into a rental you owned for 8 years, claimed CCA, no election possible | Taxable gain for the rental years and full CCA recapture in the move-in year, with no sale proceeds to pay it from |
For the numbers, use the capital gains tax calculator.
Reporting a Change in Use
- Deemed sale of a principal residence: report it on Schedule 3 with form T2091(IND) and the designation, in the year of change; see how to report a principal residence sale.
- Deemed sale of a rental: report the capital gain on Schedule 3 and any recapture on form T776.
- Elections: 45(2) with the return for the change year; 45(3) by the filing deadline for the year of actual sale (or 90 days after CRA asks).
- Missed one? See how to change a tax return, and get advice on late elections.
GST/HST: A Separate Change-of-Use Rule
GST/HST has its own change-of-use rules. They mostly matter for new or substantially renovated housing: a builder, including someone who builds or substantially renovates a home and then rents it out, may have to self-assess GST/HST at market value when the first tenant moves in, and may then qualify for the new residential rental property rebate. Ontario owners can check OntarioHSTRebates.ca. A used home moving between personal and long-term rental use generally doesn't trigger GST/HST.
The overview of property tax is on real estate tax in Canada.
Change of Use Questions
What is a change in use for tax purposes?
When you change a property from personal use to earning income, or from earning income to personal use, you are treated as having sold it and bought it back at fair market value on the date of the change.
Is renting my basement a change in use?
Usually not, if the rental is ancillary to your use of the home, there are no structural changes, and you do not claim CCA on it.
What elections are available for a change in use?
Subsection 45(2) when your home becomes a rental, and subsection 45(3) when a rental becomes your home, if no CCA was claimed. Neither is available for a partial change in use.
How do I value a property on a change in use?
At fair market value on the date of the change. A written appraisal or a realtor’s opinion based on comparable sales, obtained at the time, is the best support.
Does a change in use affect GST/HST?
For used residential property moving between personal and long-term rental use, generally not. For new or substantially renovated housing, separate GST/HST self-supply rules can apply.
Sources: CRA, Income Tax Folio S1-F3-C2, Principal Residence; Guide T4036 Rental Income; Reporting the sale of your principal residence. Checked October 2026. GST/HST change-of-use rules are only outlined here.
Last reviewed October 4, 2026 against CRA and Government of Canada sources. How we check our facts.