Principal-Residence Exemption + Section 45 Elections (Canada)
The Principal-Residence Exemption (PRE) is the single most valuable tax shelter most Canadians ever access — and converting your home to a rental triggers a deemed disposition. The Section 45 elections let you avoid the trigger, sometimes for years.
What triggers a deemed disposition
ITA Section 45(1) — a 'change in use' from personal to income-producing (or vice versa) triggers a deemed sale at fair market value. Without an election, you pay capital-gains tax even though you didn't sell anything.
Section 45(2) — own → rent
When you move out and start renting your former principal residence, file s.45(2) with your T1 in the year of change. This defers recapture for up to 4 years and continues PRE protection on the property.
Section 45(3) — rent → own
Moving into a rental as your primary residence. Defers the deemed disposition for the conversion year. Limited to 4 years backward.
The T2091 designation strategy
When you sell a property you've owned for years AND lived in for part of them, you designate principal-residence years on T2091. You can only designate one property per year (per family unit). Choose the year-mix that maximizes total PRE.
Mistakes that ruin the strategy
Renting the basement while living upstairs (CRA may treat as partial change in use)
Earning rental income for >1 year without filing s.45(2)
Selling within the s.45(2) deferral window — the deferral evaporates
Tired of spreadsheets for rent, leases, and tax season?
Central Rentals handles T776 exports, provincial notices, Stripe rent collection, and tenant screening in one place. Free for 30 days.
Start free trialCommon questions
QWhat's the deadline to file rental income to the CRA?
Rental income is reported on the T776 form filed with your personal T1 return. The deadline is April 30 of the year after you earned the income (June 15 if you're self-employed, but any balance owing is still due April 30).
QDo I need to charge GST/HST on rent?
Long-term residential rent is GST/HST-exempt. Short-term rentals (under 30 days) are taxable once you exceed the $30,000 small-supplier threshold across all your business activities.
QCan I deduct mortgage payments?
You can deduct the interest portion (and most carrying costs) of your mortgage on a rental property, but NOT the principal repayment. Central Rentals splits this automatically inside your T776 export.