If you own a property that has been your principal residence and now you decided to rent it out, for tax purposes it is considered a change in use of the property.
With a change in use, you have two options. The first option, which is the default option, there would be a deemed disposition on your property, meaning you are considered to have “sold” the property at the fair market value for tax purposes and re-acquired it. There would be no tax on any increase in the property’s value given it was your principal residence. However, any future increase in the property’s value would be subject to capital gains tax.
The second option, which requires sending an election form to CRA, ignores the deemed disposition. Instead, the capital gain that is subject to tax would be based on the number of years as a rental (less one year as per the principal residence formula) over the total years of ownership.
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