Selling your home can elicit as much excitement as buying a new one, but there are certain situations where this exciting time can be tainted by stress caused by dispositions.
A deemed disposition is a requirement to report the sale of a home or other assets on an individual’s tax return at their fair market value and subsequently reacquire them for the same amount, even if there were no actual proceeds or cash received. Deemed dispositions are most commonly used when there is a change-in-use of property from a personal residence to a rental property (for our purposes, this means more than 50% of the home is now being rented out). This reporting requirement is one that is easily overlooked, especially if the property in question used to be or continues to an individual’s principal residence.
Up until 2016, no reporting requirements existed for the sale or deemed disposition of a principal residence. The reason reporting was not required was because there was no tax payable on this transaction. Starting in 2017, CRA requires reporting of the disposition of one’s principal residence, and, provided the property qualifies as a principal residence, any gain on the sale is still exempt for tax purposes. The form T2091 is now required to be completed along with one’s personal tax return. Even if the full gain is tax exempt, there are significant penalties that can be incurred if this form is late filed (the current penalties can reach up to $8,000).
When should an individual report the disposition of their property?
If an individual begins renting out a portion of their residence but are still living in it, the following questions should be considered:
- Were any significant changes made to the property to make it rentable?
- Is more than 50% of the home being rented out?
- Was CCA claimed when reporting the rental income of the property?
If any of the answers to the questions above is ‘Yes’, there may be a deemed disposition to report.
The considerations above relate to a change-in-use of 50% or more of a principal residence, but what happens when an individual chooses to move and rent out 100% of your property?
Should this situation apply, a 45(2) election may become an option, giving an individual the opportunity to defer the recognition of the gain as well as maintain the home as a principal residence for tax purposes for up to four additional years. There are specific requirements to be eligible to make this election, such as:
- Canadian residency
- The individual is not permitted to own another home considered a principal residence during the time the election is in force
- CCA cannot be claimed on the home when reporting rental income and expenses
This election would be filed with one’s tax return in the year which the deemed disposition would have ordinarily been reported. The benefit of filing this election is it gives the remitter time to determine what they would like to do with the property, whether that means selling, moving back in the future, or maintaining it as a rental property. It is important to consult with an accountant to review the specifics in order to determine what options may be available.
Shiraz Mawani, CPA, CA