If you’re a property owner in Canada, you may be aware that there are certain tax implications associated with changing the use of your property. Whether you’re planning to convert your principal residence into a rental property or change the use of a commercial property, it’s important to understand the tax consequences and plan accordingly. In this post, we’ll discuss everything you need to know about the change in use of property and the tax implications in Canada.
What is a change in use of property?
A change in use of property occurs when the property is used for a different purpose than it was originally intended. For example, if you convert your principal residence into a rental property or use a commercial property for residential purposes, it is considered a change in use of property. Other examples of a change in use of property include changing a property from a personal use property to an income-producing property or vice versa.
What are the tax implications of a change in use of property?
When a change in use of property occurs, there are certain tax implications that property owners should be aware of. The tax implications will depend on the type of property and the nature of the change in use.
- Principal residence to rental property
If you change your principal residence into a rental property, the Canada Revenue Agency (CRA) considers this a change in use of property. As a result, you will need to report the rental income on your tax return and may be subject to capital gains tax when you eventually sell the property. However, if the property was your principal residence for every year you owned it, you may be eligible for the principal residence exemption and not owe any capital gains tax. It’s important to note that the CRA may review your claim for the principal residence exemption and deny it if they determine that the property was not used as your principal residence for every year you owned it.
- Income-producing property to personal use property
If you change an income-producing property, such as a rental property or commercial property, into a personal use property, you may be subject to capital gains tax. This is because the CRA considers the property to have been sold at fair market value and then repurchased at the same value. Any increase in the property’s value between the time it was converted and the time it is sold will be subject to capital gains tax. However, if the property was used for both personal and income-producing purposes during the time you owned it, you may be able to claim a partial exemption on the capital gains tax.
- Personal use property to income-producing property
If you change a personal use property, such as a cottage or vacation home, into an income-producing property, you will need to report any rental income on your tax return. Additionally, you may be subject to capital gains tax when you eventually sell the property, as the CRA considers this a change in use of property. However, if the property was used for both personal and income-producing purposes during the time you owned it, you may be able to claim a partial exemption on the capital gains tax.
- Commercial property to residential property
If you change a commercial property into a residential property, you may be subject to capital gains tax. This is because the CRA considers the property to have been sold at fair market value and then repurchased at the same value. Any increase in the property’s value between the time it was converted and the time it is sold will be subject to capital gains tax.
Conclusion
In conclusion, changing the use of your property can have significant tax implications. It’s important to consult with a tax professional to understand the tax consequences of a change in use of property and to plan accordingly.