Recently, many clients have been asking me:

“If I convert my investment property into my principal residence, what taxes do I need to pay? Is it complicated?”
Or:
“I’m being relocated for work for a few years. If I rent out my current home and move back later, what should I watch out for tax-wise?”

These situations are extremely common， but most homeowners don’t fully understand the tax rules behind them.

To provide clarity on this topic, I have organized the information into a three-part series that will cover:

• Converting an investment property → principal residence

• Converting a principal residence → investment property

• The key differences and shared rules between the two

Before we get started, a quick disclaimer:

I’m not a tax professional. Tax regulations are highly complex, and if anything I say isn’t perfectly precise, I welcome corrections from accountants.
My goal today is to explain everything in the simplest, most straightforward way so you understand the big picture.

When turning an investment property into your principal residence, what tax traps should you watch out for?

1. Does converting a rental to a principal residence trigger a CRA “Deemed Disposition”?

Many people think:

“I’m just changing the use of the property. Why would there be tax?”

👉 That’s NOT correct.

Under CRA rules, when a property’s use changes from rental → personal residence, you may be considered to have:

sold the property at fair market value on the day of the change, and immediately bought it back.

This means:

• If the property has gained value

• CRA could consider that you realized a capital gain

• And you may owe capital gains tax immediately

BUT here’s the good news:

You can avoid this tax trigger by filing a very important election: The 45(2) Election

2. Why is the 45(2) Election so important?

45(2) is extremely powerful because it gives you two major benefits:

✔ Benefit 1: Avoid paying capital gains tax at the moment of conversion

You don’t need to pay tax when the property’s use changes.

✔ Benefit 2: It allows your home to qualify for the Principal Residence Exemption

And even better:

You can claim up to 4 years of principal residence status retroactively, even if the property was being rented out during that time.

This is especially helpful for households that own more than one property.

However, keep in mind:

• The election must be filed within 1 year of the change in use

• You cannot continue renting the property after electing

• You cannot claim CCA (depreciation) once the use changes

3. Will the future sale of the property be fully tax-free?

That depends on these four factors:

1. How many years has it been rented

2. How many years has it been your principal residence

3. Whether you filed the 45(2) election

4. Whether you claimed depreciation (CCA) while it was a rental

General rule:

• Years you lived in the home → fully exempt

• Years it was rented → capital gains tax applies proportionally

If you filed 45(2):

 Some rental years may be treated as principal residence years — meaning those years become tax-free.

Proper tax planning can save tens of thousands in some cases.

4. Common Mistakes (These are VERY easy to fall into)

❌ Mistake 1: “If I move in, it automatically becomes my principal residence. No need to file anything.”

Wrong.
If you don’t file the 45(2) election, you may face penalties or back taxes in the future.

❌ Mistake 2: “If I move back in right before selling, I can avoid taxes.”

No — if you only live there briefly, the principal residence exemption will be tiny.

❌ Mistake 3: “Claiming depreciation (CCA) in the past doesn’t affect principal residence exemption.”

Incorrect.
If you claimed CCA, CRA will recapture it when you sell — meaning you’ll owe tax on that amount regardless.

5. A quick way to decide: Should you convert your rental into your home?

Here’s a simple rule of thumb:

If you plan to sell soon → Not recommended

Because the exemption period will be too short to make a difference.

If you plan to live there long-term (2+ years) → Highly recommended

Especially with a 45(2) election, proper planning can save a lot of tax.

Final Thoughts

Tax outcomes depend on many factors:

• When you purchased

• How long have you rented the property

• Whether you claimed CCA

• Whether you own other properties

• Whether you file the right elections on time

Each of these can dramatically change tax results.

If you’re thinking about converting a rental into your principal residence, planning ahead is absolutely essential — otherwise, it’s very easy to end up paying thousands or even tens of thousands more in tax.

Contact The Fisher Group – Your Real Estate Experts in Oakville and the GTA

Fisher Yu
📱 647.598.8488
📧 [email protected]
🌐 thefishergroup.ca