November 2020 Newsletter

Personal to income use

If you use a property for personal purposes and subsequently start to use the property for income-earning purposes, you will have a deemed disposition of the property for fair market value proceeds and a deemed new cost of the property at fair market value.

Although this rule seems strange, the main rational for the rule is to prevent you from claiming capital cost allowance (CCA − tax depreciation) or a loss on the property based on its original cost. For example, if you purchase a table for $5,000 for personal purposes and later move it to your office for business purposes when it is worth only $2,000, it would not make sense to allow you tax deductions based on the original value, since it depreciated while you were using it personally.

In this regard, if the fair market value of depreciable property at the time of the change in use happens to be greater than the original cost, the deemed acquisition cost for CCA purposes will normally be half-way between the original cost and the fair market value.

Income to personal use

Similarly, if you use a property for income-earning purposes and subsequently use the property for personal purposes, you will have a deemed disposition and new cost of the property at fair market value.

One of the rationales for this rule is to ensure that you are taxed on any “excessive” CCA on the change in use. That is, if the value of the property at that time is greater than its “undepreciated capital cost” (cost minus the CCA you have claimed), you will have an income inclusion, as the excess will be “recaptured” back into your income. If the rule did not exist, you could easily avoid (or at least defer) the recapture by changing the use to personal.

Partial change in use

The above rules also apply to a partial change in use, with modifications to take into account the partial change on a proportionate basis.

For example, say you were using a property entirely in your business (100% income use) and later began to use it personally 40% of the time. You would have a deemed disposition of a part of the property for proceeds equal to 40% of the fair market value of the entire property, and that amount would form the cost of that part of the property.

Election out of the change in use

You can elect out of the change in use from personal to income-earning purposes (the first rule above) in certain cases. For example, if you move out of your personal home and start to rent it out, you can make this election.

Conversely, if you rent out a home and subsequently move in and make it your principal residence, you can elect out of the second rule above.

Under both elections, you will not have a deemed disposition. Furthermore, you can normally designate the home as your principal residence for up to four years while you rent it out.

Last modified on November 13, 2020 12:00 am
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