Tonight I received a phone call from one of my clients about the tax implications of converting a primary residence to a rental property in Ontario, Canada. However, please note that tax laws can be complex and subject to change, so it’s always a good idea to consult with a qualified tax professional for advice tailored to your specific situation. Here are some key points to consider:
- Change in Use: When you convert your primary residence into a rental property, the Canada Revenue Agency (CRA) considers it a “change in use” for tax purposes. This means you’ll need to report this change on your tax return.
- Principal Residence Exemption (PRE): If the property was your principal residence for every year you owned it, you may have been eligible for the PRE, which allows you to claim an exemption on the capital gains when you sell your home. However, once the property becomes a rental, you may lose a portion of this exemption. The PRE is generally prorated based on the years the property was used as a rental compared to the total ownership period.
- Capital Gains Tax: When you eventually sell the rental property, you’ll be subject to capital gains tax on any increase in the property’s value since it became a rental. The taxable capital gain is typically calculated as the difference between the property’s fair market value at the time of the change in use and its selling price when you dispose of it.
- Depreciation and Capital Cost Allowance (CCA): As a rental property, you may be eligible to claim tax deductions for eligible expenses, such as mortgage interest, property taxes, insurance, repairs, and maintenance. Additionally, you can also claim capital cost allowance (CCA) on the building’s eligible costs. CCA allows you to deduct a portion of the property’s cost as a depreciation expense each year. However, claiming CCA can have implications when you sell the property, as it may trigger recapture or capital gains tax.
- Reporting Rental Income: You’ll need to report the rental income generated by the property on your tax return. Rental income is generally subject to tax at your marginal tax rate. You can also deduct eligible expenses from the rental income to reduce your taxable rental income.
Again, it’s important to consult with a tax professional to fully understand the specific tax implications in your situation and to ensure compliance with current tax laws and regulations in Ontario.