S 45(3) election

The 45(3) election is filed by the filing due date for the taxation year in which the property is actually disposed of, so when the apartment that she moved into is actually sold. For 2022, you record the rental activity on the T776 for the part year and mark it as the last year of rental.  

If you have claimed CCA on the rental apartment, the 45(3) election is not available/cannot be made.  You must, in that case, record the disposition on the T776 (building) and Schedule 3.

Is it the 45(3) election that is filed by the filing due date for the taxation year in which the property is actually disposed of, so when the apartment that she moved into is actually sold? 

For example: If she moved in 2020 and sold in 2022. No need to submit the election in 2020. Is the 45(3) election need to be filed and attached to her 2022 tax return? What is the content of the election letter?

In her 2020 tax return, is it just a check this is last year's rental in T776 and report the rental income and expense before she moved into it? and no need to make a note to CRA that this rental property will be paid the capital gain until actually sold.

Thanks a lot.

Yes, if it was a rental property up until she moved into it in 2020, just record the part year rental income and expenses and mark it as the last year of rental.  No other notification is needed to CRA. This is what CRA says about the 45(3) election:

• To make this election, attach a letter signed by you, and send it with your income tax return. If you are filing your return electronically, send the letter to your tax centre. To find the address for your tax centre, go to Find a CRA address. The letter should describe the property and state that you are making an election under subsection 45(3) of the federal Income Tax Act.
• You have to make this election by the earlier of the following dates:
  • 90 days after the date we ask you to make the election
  • the date you have to file your income tax return for the year in which you sell the property

If you make this election, you can designate the property as your principal residence for up to four years before you occupy it as your principal residence.

I used to just do the election by putting the taxpayer's name, SIN, and address, state that I am electing under ITA 45(3) to not have the deemed disposition rules apply to: and put the address of the property.  Then, in the year the now principal residence is sold, report like normal using the S3PrincipalResidenceDetails and T2091 forms in Profile, designating the property as principal residence for the years it actually was a principal residence, plus up to 4 years that it was a rental property.

If you make this election, you can designate the property as your principal residence for up to 4 years before you actually occupy it as your principal residence.

For my example: She bought this rental property in 2010, sold her principal house in 2020, and moved into her rental property in 2020.  Finally, she sold this rental property in 2025.

She can designate the property as her principal residence for up to 4 years before she actually occupies it as her principal residence, is it the year 2016?  is her capital gain on this rental property calculated from 2010 to 2016? 

Thank you very much.

In Schedule 3, is it choose the box:

I designate the property to have been my principal residence for some but not all years owned?

Thanks.

Yes, that is correct.  Keep in mind that there can only be one principal residence at a time, so if your client claimed the principal residence exemption for another property while the rental was a rental, the 4 years will not help you.  

For my example: She bought this rental property in 2010, sold her principal house in 2020, and moved into her rental property in 2020.  Finally, she sold this rental property in 2025.

She can designate the property as her principal residence for up to 4 years before she actually occupies it as her principal residence, is it the year 2016?  is her capital gain on this rental property calculated from 2010 to 2016? (sorry, i am confusing)

" Keep in mind that there can only be one principal residence at a time, so if your client claimed the principal residence exemption for another property while the rental was a rental, the 4 years will not help you. "

For my example, is it not help to her? because she live in her principal house before 2020. Therefore, the capital gain on rental property will be calculated from 2010 to 2020 not from 2010 to 2016?

Is the proceed of this rental property in 2020 base on apprasal or property assessment report provided by province?

If she had a principal residence already for the years 2010 to 2020, she will not be able to claim the principal residence exemption for those years, apart from the "1 +" year that the formula allows.  If you did not report the deemed disposition in 2020 upon the change in use to principal residence, it would result in a penalty now.  If you had reported a deemed disposition, the gain on the rental would be calculated from 2010 to 2020, based upon FMV upon moving in.  Since you did not report the deemed disposition, you would make the 45(3) election when selling in 2025 and claim a partial principal residence exemption.  It will get calculated based on cost in 2010, actual proceeds in 2025, prorated based on # of years it was a principal residence.  I believe the formula would be:  2020 to 2025 inclusive is 6 years, formula gives you "plus 1", total years owned is 16 years, so 7/16 would qualify for the exemption.  When the principal residence exemption is a partial exemption, it does not matter when the gain actually occurred and you do not need to know the FMV at any date between actual purchase and actual sale.

Hope this makes sense - it is complicated, but should become clearer when you complete the actual form to claim the partial exemption.

" Keep in mind that there can only be one principal residence at a time, so if your client claimed the principal residence exemption for another property while the rental was a rental, the 4 years will not help you. "

What is this meaning? Sorry, I am confused about the above statement

Keep in mind that there can only be one principal residence at a time, so if your client claimed the principal residence exemption for another property while the rental was a rental, the 4 years will not help you.  

I am confusing this statement as well.

A person can have as many residences as they want, but only 1 can qualify for the exemption from capital gains in any 1 year.  So, if a person has more than one residence which qualifies as a principal residence (like a rental would if you make the 45(3) election, or if they had a vacation property, for 2 examples), they have to choose which property to claim the exemption on.  It will depend upon which property has the largest capital gain.

So in which year is the capital gains added to your already taxable income? Is it in the year that you sold the property? 
Or do they go back and add it to the year that you moved into the property? I’m assuming it’s the first option. I had no idea that moving  to my previous rental would trigger this. I never claimed CCA during any of the years that it was a rental property. 

If there was no election made when you moved into the formerly rental property, then there is a deemed disposition at the time you move in.  You have disposed of a rental property at its FMV at that time.  The capital gain would be reported at the time you move in.

I think this is getting a bit complicated for this forum.  You should likely be getting an advance ruling from CRA.  My concern would be that, if the property was originally purchased as an income producing property,  the 45(2) election (when the property is changed from a principal residence back to income producing) might not be available to you.  The 45(2) is available if you purchase a property as a principal residence and then convert it to a rental.  This property was not purchased as a principal residence - it was purchased as an income producing property.  Additionally, the 45(2) election must be made at the time of the change in use by attaching a letter to the tax return.

janisbossenberry,thanks for your reply. I can imagine there must be not a few people who are in the same situation, ie rental->personal use -> rental again. So forget about the 45(2) election. The question is when to file the 45(3) and how to report the change from personal use to rental (second change in use)? My inclination is to file 45(3) when the second change in use occurs as it's a deemed disposition, and also report this deemed disposition on T2091. Does this make sense to you?

A 45(3) election is not made until the property is actually sold.  You do not have to report the deemed disposition when changing a principal residence to a rental.  When the actual sale occurs, you make the election and use the "plus 4" years in determining how much of the principal residence you will claim.

janisbossenberry, my issue with this approach is that when the property changes from personal use to rental again, isn't there a deemed disposition and hence need to be reported? If I understand you correctly, you are saying don't report this deemed disposition and only report the final sale?

Suppose there is one last change in use before a final sale. So the sequence is rental -> personal use -> rental -> personal use -> final sale. So don't report this third and last change in use also? Only report final sale?

Both a 45(3) election (made when changing a property from rental to personal use) and a 45(2) election (made when changing a personal use property to a rental) include similar words like this:

If you make the election, the preceding section of the Income Tax Act which deems you to have disposed of the property shall not apply - there will be no deemed election.

So, if you qualify to make the election in the first place, then there is no deemed disposition.  That is the whole purpose to the elections.

Yes, I understand that making the elections would make the deemed disposition not apply. But I am not fully understanding when the elections should be made. If the 45(3) election for the first change in use from rental to personal use is to be made only when the property is ultimately sold, then are elections still necessary for the second and third chances in use, assuming I do qualify? Sorry I just want to get the technicalities right. I suppose it also makes sense to make just one 45(3) election and file one T2091 at the final sale, and use the formula to include the additional 4 years of PRE on top of the actual number of years of personal use to calculate the ultimate capital gain. 

Yes, that is correct.  You do not file the 45(3) election until the final sale and then you figure out the number of years of principal residence exemption at that same time.

Thank you very much janisbossenberry!