A couple owned their home for 20 years. For 8 of those years they rented out a self-contained basement apartment, created by renovation and making up 40% of the home, and they claimed capital cost allowance on it. When they sell, how does this affect their principal residence exemption?
Correct Answer
C) They must pay capital gains tax on the proportionate rental use during rental years only
Converting 40% of the home into a separate rental unit is a partial change in use, so the Income Tax Act deems that portion disposed of at fair market value when the rental began (s. 45(1)(c)). The gain up to then is sheltered by the exemption, but the gain on the rented 40% during the 8 rental years is taxable. The CRA's relief for ancillary rentals does not apply because there was a structural change and CCA was claimed, and claiming CCA also rescinds any subsection 45(2) election.
Why This Is the Correct Answer
This is correct because a partial change in use with a structural change and CCA claims triggers a deemed disposition of the rented 40% portion at the start of the rental. The exemption continues for the home as a whole outside that portion and period, so only the gain attributable to the rental portion during the rental years is taxable.
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A couple has owned a city home worth $600,000 and a cottage worth $400,000 for the same ten years; each property has a $200,000 gain and qualifies as their principal residence for every year. They sell both in the same year and may designate only one property per year. How does the choice of property affect their taxable gain?