The Hidden Tax Rule Most Canadians Don’t Know: Renting Out Your Home Could Trigger a Huge Tax Bill

Here’s a secret most homeowners never hear about until it’s too late:
The moment you rent out your principal residence, the CRA can treat it as if you sold it at fair market value. That means you could owe capital gains tax immediately — even though you never sold your house.

But here’s the good news: there’s a little-known election, buried in the Income Tax Act, that can delay or even eliminate that tax hit. It’s called the subsection 45(2) election, and almost no one outside of accountants and tax pros has heard of it.

Let’s break it down — because knowing this one rule can save you tens of thousands of dollars.

Who Qualifies for the 45(2) Election?

This election isn’t for everyone. To qualify:
You must have lived in the property as your principal residence first.
Then you convert it to a rental property.
You don’t claim depreciation (CCA) while it’s rented.

You do not qualify if:

• You bought the property as a rental from day one.

• You never lived in it yourself.

Quick Examples

• Qualifies: Bought a condo in 2020, lived there until 2025, then rented it out → 45(2) available.

• Doesn’t Qualify: Bought a townhouse in 2025 and immediately rented it → no 45(2).

Situation 1: You Rent Out the Whole Home (Move Out Completely)

If you move out and rent your property fully, CRA sees this as a “change in use.”

• That triggers a deemed sale at fair market value.

• If the property has increased in value, that could mean a surprise tax bill right away.

Tax Tip: File the 45(2) election to:

• Defer the deemed sale (no tax today).

• Keep treating your home as a principal residence for up to 4 more years while it’s rented.

Situation 2: You Rent Out Part of the Home (e.g., Basement Suite)

If you still live in the home, there’s no full change in use.

• Only the rented portion may be taxable later.

• You can deduct rental expenses (split between personal/rental).

Situation 3: You Rent for Short-Term (1–4 Years)

Perfect case for the 45(2) election:

• You can still claim the home as your principal residence for up to 4 years after moving out.

• If you move back in, the clock can reset.

Situation 4: You Rent Long-Term (5+ Years)

The 45(2) election only covers 4 extra years. Beyond that, CRA will tax you on the gain for the extra years.

Example:

• Bought for $400,000 in 2015.

• FMV $700,000 in 2025 when you start renting.

• Sell in 2031 for $850,000.

• With 45(2): Tax only on 2 years of gain (2030–2031).

• Without 45(2): You’d face tax on the gain from 2025 forward.

Situation 5: Short-Term Rentals (Airbnb/VRBO)

Even a few weeks of Airbnb means you must report income.

• Use Form T776 to report.

• Expenses can be prorated for rental days.

Action Steps if You’re Thinking About Renting

1. Check if you qualify for the 45(2) election.

2. File the election with CRA if you’re renting the whole home.

3. Track fair market value on the date you start renting.

4. Report rental income/expenses yearly.

5. Update insurance & mortgage for rental use.

6. Plan ahead if you’ll rent longer than 4 years.

Final Word

Most Canadians renting out their home have no idea about the 45(2) election — until they face a shocking tax bill. Don’t get caught off guard. With the right election and planning, you can delay capital gains, protect your principal residence exemption, and keep more of your equity when you sell.

Thinking about renting your home? Talk to a tax professional TiKi Tax before you list it. This one little-known tax election could save you thousands