Claiming CCA on Rental Properties and Section 45(3) Elections: The Incompatibility Explained

If you're a Canadian taxpayer who's has been renting out a property and now wants to move back in – converting it from income-producing to your principal residence – you're likely eyeing the principal residence exemption (PRE) to shield future gains on sale. A key tool here is the Subsection 45(3) election, which lets you designate the property as your principal residence (section 54) for up to four extra years before you actually occupy it, deferring any deemed disposition at fair market value (FMV).

But here's the cache .. if you've claimed Capital Cost Allowance (CCA) on the property during its rental period, you generally cannot make a 45(3) election.

If you have claimed CCA, you must instead:

• Report any applicable recapture of CCA as income in the year the use of the property changed.

• Acknowledge a deemed disposition of the property at its fair market value at the time of the change of use.

• Calculate and report any resulting capital gain based on that deemed disposition. 

Because claiming CCA makes the 45(3) election unavailable, you will not be able to defer the capital gains until the eventual sale of the property.

The Rationale

This restriction stems from the anti-avoidance rule in Subsection 45(4) designed to prevent double-dipping. It defines the inability of a taxpayer, their spouse or common-law, or a trust to make a subsection 45(3) election after claiming Capital Cost Allowance (CCA) is outlined in Subsection 45(4) – preventing taxpayers from enjoying depreciation deductions during the income-producing phase while later shielding the full gain under the principal residence exemption (PRE).

Although Subsection 45(4) is not explicitly tagged as "anti-avoidance" (unlike GAAR in section 245), 45(4)'s design prevents double-dipping, the CRA takes this standpoint and views CCA as inconsistent with PRE's personal-use focus, for obvious reasons.

This mirrors the flip side: For 45(2) elections (principal residence to rental), claiming CCA rescinds the election retroactively.

By blocking the election, 45(4) forces a deemed disposition at FMV under 45(1)(a), triggering immediate capital gains and CCA recapture (section 13(1)). This ensures consistency: If you treated it as depreciable for deductions, you can't retroactively claim it as exempt personal property.

Amending Past Returns to Remove CCA Claims for a Section 45(3) Election: Possible, But Risky and Often Denied

Don't attempt to smart with it .. I'm sure you're thinking it's theoretically possible to amend prior tax returns to remove previously claimed Capital Cost Allowance (CCA) and then file a subsection 45(3) election – but in practice, the CRA often rejects such requests as retroactive tax planning.

Many taxpayers and advisors have tried this strategy, with mixed success. CRA's Income Tax Folio S1-F3-C2 doesn't directly address amendments for this purpose, but emphasizes 45(4)'s absolute bar if CCA was "allowed." CRA frequently denies as impermissible retroactive planning, leaving you with the original tax hit plus potential penalties. Removing it retroactively is seen as rewriting history to gain an undue advantage (e.g., past deductions + future full PRE).

One should be aware as follows:

• General Anti-Avoidance Rule (s.245) could apply if viewed as abusive – though rare for individuals.

• Often denied if it creates a net benefit (e.g., "You claimed CCA assuming depreciation; now undoing because of appreciation? No.").

• Late 45(3) filings are accepted discretionarily, but tied to no CCA history.

  
  

Safer Alternatives

• Accept Deemed Disposition: Trigger gain/recapture now (at conversion FMV), pay tax, then full PRE post-move-in. Avoids amendment fights.

• Plan Ahead: For future rentals, skip CCA from day one if PRE is priority.

• Partial Use: If only portion rented, rules prorate – CCA on rental part may block only that slice.

Planning on purchasing, selling, or changing the use of a rental property in Kelowna? Contact us today to ensure proper tax planning.