The day you start renting out the home you used to live in, the Canada Revenue Agency treats you as having sold it. You did not sell it, no money moved, and there is nothing to sign. It happens anyway, and most owners find out about it years later when they actually do sell.
I am the Broker at GoodDoors, and I have watched this catch enough first-time landlords in Regina and Saskatoon that it is worth setting out properly. This page covers what the change of use rule is, the election that switches it off, the conditions attached to that election, and the exception that matters most here in Saskatchewan, which is the basement suite.
This is information, not tax advice. The election is filed with your return and the numbers are your accountant's job. What follows is what the rule actually says, so you know to ask.
Last updated: August 2026. Sourced to the Canada Revenue Agency, with the Income Tax Act sections named.Quick answer
Change the use of a property and the CRA considers you to have sold it at fair market value and immediately reacquired it at the same amount. The gain for the years it was your principal residence is exempt. The gain for the years it was not is reportable in the year the use changed. A subsection 45(2) election means you report no capital gain at the change of use at all, but it rules out claiming capital cost allowance.
What a change of use actually is
The CRA's own words: "Every time you change the use of a property, you are considered to have sold the property at its fair market value and have immediately reacquired the property for the same amount."
The two situations that trigger it for most people:
- You change all or part of your principal residence into a rental or business property.
- You change your rental or business property back into a principal residence.
If the property was your principal residence for any year you owned it before the change, you do not pay tax on the gain relating to those years. You only report the gain relating to the years it was not your principal residence.
The subsection 45(2) election
When you turn a principal residence into an income producing property, you can elect not to be treated as having started to use it that way. The effect is that you do not report any capital gain when the use changes.
Two things come with it:
You cannot claim capital cost allowance on the property. CCA is the depreciation deduction on the building. Claiming it and holding this election are incompatible. For a lot of owners this is the whole decision: CCA reduces rental income tax now, the election protects the principal residence exemption later, and you cannot have both. Rental income is still reportable. The election covers the deemed disposition, not the rent. Net income after expenses goes on your return as usual, generally on Form T776.The four year rule
While the election is in effect you can designate the property as your principal residence for up to four years even though you are not living in it. During those years you have to meet both of these:
- you do not designate any other property as your principal residence
- you are a resident, or deemed to be a resident, of Canada
Extending past four years
The four year limit can be extended indefinitely, but only for an employer relocation, and the CRA requires all four of the following:
- You live away from your principal residence because your employer, or your spouse's or common-law partner's employer, wants you to relocate.
- You and your spouse or common-law partner are not related to the employer.
- You return to the original home while still with the same employer, or before the end of the year following the year that employment ends, or you die during the term of employment.
- Your original home is at least 40 kilometres farther, by the shortest public route, than your temporary residence is from the new place of employment.
How you actually make the election
Attach a signed letter to your income tax and benefit return for the year the change of use occurs. Describe the property, and state that you want subsection 45(2) of the Income Tax Act to apply. There is no form.
Moving back in: subsection 45(3)
Going the other way, when a rental becomes your principal residence again, you can elect to postpone reporting the disposition until you actually sell.
You cannot make this election if you, your spouse or common-law partner, or a trust under which either of you is a beneficiary, has deducted CCA on the property for any tax year after 1984 up to the day the use changed. CCA closes this door too.
With the election you can designate the property as your principal residence for up to four years before you actually occupy it.
The deadline is the earliest of: 90 days after the CRA asks you to make the election, or the date your return is due for the year you actually sell.
The basement suite exception, which matters here
Renting one part of a home you still live in is the most common version of this in Saskatchewan, and it has its own treatment.
Since March 19, 2019 you can elect under 45(2) or 45(3) against the deemed disposition that normally arises on a partial change in use. Before that date you could not.
Even without an election, the CRA usually does not treat you as having changed the use of that part of the home if all three of these hold:
- the rental or business use is relatively small in relation to the use as your principal residence
- you make no structural changes to the property to make it more suitable for renting
- you deduct no CCA on the rented part
The middle condition is where suite owners get caught. Adding a separate entrance, a second kitchen, or firewall separation to bring a suite up to code is a structural change. It is often the right thing to do for the property, and it can cost you this safe harbour, so it is a conversation to have with your accountant before the work starts rather than after.
What qualifies as a principal residence
A property qualifies for any year if all of these are true:
- it is a housing unit, a leasehold interest in one, or a share in a co-operative housing corporation acquired to get the right to inhabit a unit
- you own it alone or jointly
- you, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year
- you designate it as your principal residence
You designate the property when you sell or are considered to have sold it. A sale, including a deemed one, is reported on Schedule 3 and Form T2091(IND).
Where this sits in the bigger decision
The change of use rule is one input into a larger question, and it is rarely the one that decides it. If you are working through that decision, these go deeper:
- Should you rent or sell your house in Saskatchewan? has the break-even math for both cities
- The accidental landlord's guide to Saskatchewan is the whole path if you did not buy the place as an investment
- You inherited a house in Saskatchewan covers the estate version, where the cost base rules are different again
- Converting your home to a rental property is the practical checklist for the move itself
- Rental tax deductions in Saskatchewan covers what you can claim once it is rented
- Landlord and tenant rights in Saskatchewan is the statutory side, once you have a tenant
If the answer is that you are keeping it and renting it out, that is the part we do. GoodDoors manages residential property in Regina and Saskatoon, and the day one items on this page, the valuation date and the conversation with your accountant, are worth handling before the first tenant moves in rather than after.
Sources
- Canada Revenue Agency: Principal residence
- Income Tax Act, subsections 45(1), 45(2) and 45(3)
- Guide T4036, Rental Income
- Form T2091(IND), Designation of a Property as a Principal Residence by an Individual
Frequently Asked Questions
What are the tax implications of a partial change in use of my principal residence?
Renting out part of the home you live in can trigger a deemed disposition of that portion at fair market value. The CRA usually does not treat it as a change of use if the rental use is relatively small relative to your own use, you make no structural changes to suit the rental, and you claim no CCA on the rented part. Fail any of those three and the deemed disposition applies to that portion. Since March 19, 2019 you can also elect under subsection 45(2) or 45(3) against it.
Can you claim principal residence on a rental property?
Only in specific circumstances. With a subsection 45(2) election in place you can designate a property you are renting out as your principal residence for up to four years, provided you designate no other property and remain a resident of Canada. Under subsection 45(3), moving into a former rental, you can designate it for up to four years before you actually occupied it. Outside those elections, a year the property was not lived in by you, your spouse or common-law partner, or your child does not qualify.
What is the 4 year rule for principal residence?
It is the period a subsection 45(2) election lets you designate a property as your principal residence while you are not living in it. Four years, conditional on not designating any other property and being resident or deemed resident of Canada. It extends indefinitely only for an employer relocation meeting all four CRA conditions, including that your original home is at least 40 kilometres farther from the new workplace than the temporary one.
Who qualifies for principal residence exemption in Canada?
An individual who owned the property, alone or jointly, where they, their current or former spouse or common-law partner, or one of their children lived in it at some point in the year, and who designates it as their principal residence for that year. The exemption is limited to tax years ending after acquisition during which the taxpayer was resident in Canada and the property was their principal residence.
What qualifies as a principal residence?
A house, cottage, condominium, an apartment in an apartment building or a duplex, a trailer, a mobile home or a houseboat, provided the ownership, occupancy and designation conditions are met. The land underneath usually counts up to half a hectare, or 1.24 acres, and more only if you can show the extra land was needed to use and enjoy the home, for example where the municipal minimum lot size was larger.
Can you sell a rental property and not pay capital gains in Canada?
Not by simply selling it. The gain relating to the years the property was not your principal residence is reportable. What reduces or removes the tax is the principal residence exemption for the years it did qualify, plus a 45(2) or 45(3) election where one applies. There is no general exemption for selling a rental, and a deemed disposition on a change of use is treated the same way as an actual sale.
What is the 90% rule in Canada?
There is no "90% rule" in the principal residence rules, and it is worth saying plainly rather than inventing one. People usually mean either the GST or HST new housing rebate tests, or the informal idea that the property has to be almost entirely personal use to keep the exemption clean. The actual test for a partial rental is the CRA's three conditions above: relatively small rental use, no structural changes, and no CCA claimed.
What is the 2% rule for properties?
It is an American investing rule of thumb, that monthly rent should be about 2% of the purchase price, and it does not survive contact with the Saskatchewan market or with any Canadian market at current prices. It has nothing to do with the tax rules on this page. If you want to run the numbers on a specific property, use the rental property calculator instead of a rule of thumb.
