Moving out and renting the entire former home can create a tax event even though no buyer appears and no sale proceeds arrive. Change-of-use rules generally treat the property as disposed of and reacquired at fair market value.
Before filing for the conversion year, decide whether to report that deemed sale or make a subsection 45(2) election. A rental-income entry does not make the election for you.
Preserve the facts at the conversion date
Keep the date the use changed, the lease, the ownership history and evidence supporting the property's value at that time. A well-supported valuation is easier to obtain close to the event than years later.
Retain acquisition and improvement costs too. A current market estimate without the historical cost file does not explain the gain accumulated before conversion.
Review an election before claiming depreciation
A subsection 45(2) election can defer the deemed disposition when a principal residence becomes income-producing property. Without an election, report the deemed sale in the conversion year and claim any available principal-residence exemption using Schedule 3 and Form T2091(IND). An exempt gain still needs its reporting and designation.
With the election in force, you can potentially designate the former home for up to four years when you do not live there, provided you remain resident or deemed resident in Canada and no other home is designated by you or your family unit for those same years. Certain employment relocations can extend that period. The ordinary four-year rule is not a promise that every year of a long rental will be exempt.
For example, moving into another home you own means comparing both properties before choosing which years to designate. Moving into a rented apartment does not create that same competing property. The election itself and the eventual designation of years are separate decisions.
Do not claim capital cost allowance on the property while the election applies. Claiming it is treated as cancelling the election from the first day of that tax year, with a deemed disposition at that point. A small depreciation deduction can therefore change the much larger property calculation.
Do not treat the election as a blanket promise that the eventual sale will be tax-free. Its suitability depends on the complete ownership, residence and use history.
Send the election with the right year's return
The CRA requires a signed letter describing the property and stating that you elect under subsection 45(2). File it with the return for the year the use changed. For electronic returns, follow the CRA's separate election-document instructions; keep the letter and proof of submission with that year's return.
If the conversion was missed in an earlier year, review a late election rather than silently dating it this year. CRA acceptance is conditional, including consideration of whether capital cost allowance has already been claimed.
Keep rent reporting separate
An election does not exempt the ongoing rental income. Keep the rent ledger and eligible expense records from the start of the rental activity.
Renting only a room raises a different analysis from converting the whole property. Likewise, moving back into a rental can involve a different election and restrictions related to past capital cost allowance claims.
Before filing, record whether an election was made, retain the signed document and submission evidence, and carry that history into future years. The next preparer needs to know the choice already made.