One of my clients purchased a condo back in 2018, which she rented out till November 2021 when she sold principal residence and moved to condo. I was told she needs to attach letter (with 2021 return) to CRA with regards to 45.3 election. Please confirm.
Also, claim "deemed disposition" of condo (2018 to November 2021 - $660K in 2018 to )? therefore capital gains? Please advise
If I have this right, the condo is your client's first and only purchase. Did your client live in the condo at any time before it was rented out? If no, then I'm not certain you can make the election under subsection 45(2) and it has had to have been lived in by the client in order to qualify as a principal residence. Further, the letter was supposed to have been submitted for the first tax year where there was a change of use, though "The CRA states Income Tax Folio S1-F3-C2, Principal Residence that while it has the authority to accept a late-filed election under certain conditions..." ("Preparing your Income Tax Returns" Para 555.05), so a late letter may work. However, if by any chance your client took CCA on the property during the years it was a rental, then the election cannot happen.
Hope this helps.
Am amending my reply after re-reading the query. I'm looking at para 555.15 of "Preparing Your Income Tax Returns" which again states cannot have taken CCA if want the 45(3) election. However, this para does not address the issue you have, which is that your client already had a principal residence. So while you might be able to use the 43(3) election for your client to defer paying taxes on the capital gain, you will not be able to give him/her the four years prior designation as a principal residence. What is not certain is when the election has to be made. From the same book: "The election must be made on or before the earlier of two days - the day that is 90 days after the CRA demands the election and your filing-due date for the year in which the property is actually disposed of." So it rather looks as if the election is not to be filed until the condo is sold.
It is essential that you make certain everything is well documented, especially the original cost of the condo and the fair market value as of date of conversion. Your client will need this information when the condo is sold further down the road and you might not be available at that time to explain the calculations. This is something the client needs in writing and with the understanding it's for a future return and so to keep it someplace accessible.
Again, hope this helps.
Hi - thanks for the reply. Yes, the client lived in another property (principal residence) when she bought the condo in 2008. In November 2021 she sold her principal residence (which will be reported in S3 accordingly) and moved to the condo (rental property since purchase date, no CCA was ever claimed on condo). She does have a purchase agreement of the condo as well aa written quote from a Real Estate Agent regarding the FMV of the condo on the date she moved in - now her principal residence. I will stress the need to keep these documents safely for when she decides to sell the condo. Thanks