When you change the use of your home from business or income-earning purposes back to your principal residence, the Canada Revenue Agency (CRA) “deems” that you to have carried out a sale of your property.
That means that for tax purposes the CRA considers that you sold your property even though you have not. The same applies if you change the use of your principal residence to income-earning or business purposes.
A “deemed” sale on your property may result in capital gains regardless of whether it is a total or partial conversion. However, you may partially or wholly eliminate your capital gains if you claim the principal residence exemption.
Converting your whole house from use as a principal residence to income-earning purposes is more straightforward than when you convert a part of your house. A partial conversion from principal residence use to business or rental income use means that you need to calculate the “deemed” sale and purchase on only the portion of the house converted.
You should note that not all partial conversions of your house for income-earning purposes are considered “deemed” dispositions. If converting your house to use for business or to generate rental income does not involve structural changes and you only rent out a room, use a space or room for a home office, or carry out daycare services, this will not result in a “deemed” disposition. In this instance, you can deduct home expenses related to the business use portion of your home from the income generated.
On the other hand, if you must carry out significant structural changes to your home to use as a business, or if you reconstruct a part of it as a stand-alone rental unit, this may result in a “deemed” disposition and a recognition of potential capital gains.
Professional tax advice upon changing the use of your property is a good idea, as the stakes can be high. If you are deemed to have disposed of part of or all your property before a significant appreciation in the property’s value, you will likely have to pay capital gains tax. That’s because it’s only a person’s principal residence that can be sold tax-free. If the property is “deemed” commercial after a change in use, and it is sold at a profit, get ready to cut a cheque to the CRA.
Having a conversation with your professional tax and financial advisors upon changing the use of your property is a good idea, as the stakes can be high. If this is something you have in mind, reach out to your Foster team.
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
