Change of Use of a Property: The Deemed Disposition, the Capital Gain, and the 45(2)/45(3) Elections for Your Plex

ImmoMulti — direct buyer of income properties on the North Shore — regularly meets owners surprised to learn they may owe tax on an income property they have not sold. The cause: a change of use. When you turn your principal residence into a rental property, or the reverse, the Canada Revenue Agency (CRA) and Revenu Québec consider that you have disposed of the property at its fair market value, then reacquired it at the same amount. This "deemed disposition" can trigger a taxable capital gain — with no actual sale and no money received. Fortunately, two tax elections (subsections 45(2) and 45(3)) let you defer that tax. Here is how these rules apply, especially for a plex owner-occupant.

What is a change of use for tax purposes?

A change of use occurs when you stop using a property one way and start using it another way: turning your principal residence into a rental property, or turning a rental property into your principal residence. For tax purposes, this change is treated like a sale — the "deemed disposition."

For tax purposes, a property's use determines its treatment. A principal residence benefits from a capital gains exemption, while a rental or income property is a property used to earn income, whose gain is taxable on disposition. When you move a property from one category to the other, the tax authorities consider that a taxable event occurs — even though you remain the owner.

According to Revenu Québec, a change of use happens notably when you start renting out a property you were living in, or when you move into a property you were renting out. This is extremely common among plex owners: keeping a former unit to rent after moving out, or taking back a rented unit to live in it yourself.

Source: Revenu Québec — Renting Out a Residence (Change of Use).

Why does a change of use trigger a deemed disposition?

On a change of use, you are deemed to have disposed of the property at its fair market value (FMV), then to have reacquired it immediately at the same amount. This deemed disposition can crystallize a capital gain for the year of the change of use — with no actual sale having taken place.

The mechanism is the same at the CRA and Revenu Québec: at the moment of the change of use, you are deemed to have disposed of the property at its fair market value, then to have reacquired it immediately at the same amount. This value becomes your new tax cost (adjusted cost base) for calculating the future gain.

Concretely, if your property has appreciated since you acquired it, the difference between the FMV at the change of use and your original cost is a capital gain. This gain must, in principle, be reported for the year of the change of use.

There is an important nuance depending on the direction of the change:

• Principal residence becoming a rental: the gain accrued while the property was your principal residence is generally covered by the principal residence exemption. It is the gain accruing after the change of use that becomes taxable.
• Rental becoming a principal residence: the gain accrued during the rental period is taxable at the applicable inclusion rate, unless deferred by a tax election.

Source: Canada Revenue Agency — Changing your property to a rental or business property (and vice versa).

How does the subsection 45(2) election defer the tax (residence → rental)?

The 45(2) election (section 284 of the Québec Taxation Act) applies when a principal residence becomes a rental property. It lets you avoid reporting the deemed disposition, defer the gain until the actual sale, and designate the property as your principal residence for up to 4 additional years — if no CCA has been claimed.

When you turn your principal residence into an income property, subsection 45(2) of the Income Tax Act lets you elect not to be considered to have changed the use of the property. The result: you defer recognition of the deemed disposition — and therefore the tax — until the actual sale of the property.

This election offers an added benefit: it lets you continue to designate the property as your principal residence for up to four additional years after the rental begins, even if you no longer live there. This extended designation can reduce, or even eliminate, the taxable gain — provided you do not designate another property as your principal residence for those same years.

The core condition: you must not have claimed capital cost allowance (CCA/DPA) on the property. As soon as CCA is claimed on the rental portion for any year after 1984, the 45(2) election becomes impossible.

Sources: CRA — Changing your property; Revenu Québec — Change of Use (s. 284).

How does the subsection 45(3) election work (rental → residence)?

The 45(3) election (section 286.1 of the Québec Taxation Act) applies when a rental property becomes your principal residence. It defers the gain from the deemed disposition until the actual sale and lets you designate the property as your principal residence for up to 4 years prior to the change — if no CCA has been claimed after 1984.

The reverse situation is just as common: you own a rental property or a unit in your plex that you decide to occupy yourself. This move from a rental use to a personal use is also a change of use, and therefore a deemed disposition at FMV.

Subsection 45(3) of the Income Tax Act then lets you defer the capital gain arising from that deemed disposition until the actual sale of the property. Better still: it allows you to designate the property as your principal residence for up to four years prior to the change of use, which can reduce the taxable gain for the rental period.

The same restriction applies: the 45(3) election is impossible if CCA has been claimed on the property for any year after 1984. In Québec, this election is made under section 286.1 of the Taxation Act.

Sources: CRA — Changing your property; Revenu Québec — Change of Use.

How does a change of use apply to a plex owner-occupant?

In a plex where you live in one unit and rent the others, the property has a mixed use from the start. A partial change of use occurs when you change the proportion you occupy versus the proportion you rent. The deemed disposition then applies to the portion whose use changes, calculated by square footage.

The plex owner-occupant — the one who lives in one unit of their duplex, triplex, or quadruplex and rents the others — faces a particular tax reality. Their building has a mixed use: one part serves as a principal residence, the other is used to earn income.

A partial change of use occurs when that proportion changes. Typical examples on the North Shore:

• You move out of your triplex unit to live elsewhere and now rent out your former unit — the residential portion becomes rental;
• You take back a unit you were renting to occupy it yourself — the rental portion becomes residential;
• You convert an occupied basement into an additional rental unit.

In each of these cases, the deemed disposition applies to the portion whose use changes, generally calculated by the relative square footage of the units. The CRA also provides a de minimis rule: when the change of use is ancillary, small in scale, and no CCA is claimed, it may not be necessary to recognize a deemed disposition. This rule is delicate to apply, however — a tax specialist should validate your situation.

How does a change of use affect the future sale of your plex?

The fair market value used at the change of use becomes the property's new tax cost. On the later sale of your plex, the taxable gain is calculated from this value. Documenting the FMV well at the moment of the change (appraisal, comparables, square footage per use) is therefore essential for a North Shore owner.

A change of use is not just a one-time event: it redefines the tax starting point of your property for all subsequent years. The FMV established at the moment of the change becomes the reference cost for calculating the gain on the actual sale of your plex.

For an owner of a North Shore income property — Terrebonne, Mascouche, Blainville, Boisbriand, Saint-Jérôme, Saint-Eustache, Deux-Montagnes — where values have risen sharply in recent years, the gap between the FMV at the change of use and the future sale price directly determines the tax payable. Hence the importance of documenting this value rigorously: certified appraisal, market comparables, square footage of each use, photos, and the condition of the property.

To dig deeper into the mechanics of the tax on sale, see our guide on capital gains on the sale of your plex and, if you claimed CCA, our article on CCA recapture on sale.

Finally, remember that these tax elections are irreversible in several cases and subject to strict filing deadlines. Before you act, consult a tax specialist, accountant, or notary to analyze your specific situation and file the required documents correctly.

Which events trigger a change of use for a plex owner?

A change of use is not limited to a big move. Renting out a formerly occupied unit, taking back a rented unit to live in it, converting a basement into a unit, or altering the occupied proportion of a multi-unit building are all events that, in the eyes of the CRA and Revenu Québec, trigger a deemed disposition on the portion involved.

Many owner-occupants think a change of use exists only when you abruptly turn a house into an income property, or the reverse. The reality is subtler. In a plex, the use is mixed from the start, and every change in the split between the occupied portion and the rented portion can be a change of use — total or partial. It is best to recognize these situations before they happen, because the deemed disposition crystallizes on the exact date of the change, not when you discover it while preparing your taxes.

The most common scenarios on the North Shore

Here are the situations most often faced by owners of a duplex, triplex, and quadruplex in Terrebonne, Blainville, Mascouche, or Saint-Eustache:

In each case, the question is not whether a change of use occurred, but what proportion of the property changed use and at what value. It is that proportion, applied to the fair market value of the building on the date of the change, that determines the gain to report or defer.

The central role of the date

The date of the change of use is decisive. It fixes the reference FMV, it starts the deadline to file the election (with your return for the relevant year), and it marks the start — or end — of the principal residence designation period. An owner who rents out a unit "sometime in the spring" without noting a precise date is left exposed if the CRA asks for support. Note the date, keep the rental listing, the first signed lease, and a valuation as close as possible to that date.

Source: Canada Revenue Agency — Changing your property; Revenu Québec — Change of Use.

How do you calculate the gain on a deemed disposition, step by step?

The gain is the fair market value at the change-of-use date minus the adjusted cost base (ACB) of the portion involved. You then apply the inclusion rate (50% below the $250,000 annual threshold for an individual) and, where applicable, the principal residence exemption on the eligible portion.

Calculating a deemed disposition follows the same logic as an actual sale, with one difference: no money changes hands. Here is the sequence, which you can reproduce for your own situation before consulting a professional.

Step 1 — Determine the adjusted cost base

The adjusted cost base (ACB) is your tax cost: the purchase price of the building, plus acquisition costs (transfer duties, notary fees, inspection), plus the capital improvements made over the years. In a mixed-use plex, you must split this ACB between the occupied portion and the rented portion, generally by square footage.

Step 2 — Establish the fair market value at the change date

The FMV is what an informed buyer would pay for the property on the change-of-use date. For a North Shore plex, this value is documented by a certified appraisal, recent sale comparables in the sector, or the income capitalization method (cap rate) for the rental portion.

Step 3 — Calculate the gain on the portion involved

The capital gain on the portion changing use is: FMV of the portion − ACB of the portion. If the use of 40% of the square footage changes, you apply 40% to the value and cost of the building.

Step 4 — Apply the inclusion rate

Only a fraction of the gain is taxable. For an individual, the inclusion rate remains 50% (one-half), with a $250,000 annual threshold above which a higher rate had been proposed — but that increase was cancelled by the federal government. In practice, half the gain is added to your taxable income for the year of the change of use.

Purely illustrative example. Actual figures depend on your ACB, the documented FMV, the applicable principal residence exemption, and your marginal rate. Have the calculation validated by a tax specialist.

Step 5 — Apply the principal residence exemption, if applicable

If the portion changing use was your principal residence, the principal residence exemption can reduce or eliminate the gain for the years the property was designated as such. The exemption is calculated using a formula based on the number of designation years plus one, divided by the number of years of ownership. This is where the extra 4-year designation offered by the 45(2) and 45(3) elections becomes valuable.

Sources: Department of Finance Canada — Capital gains inclusion rate (increase cancelled, remains 50%); CRA — Changing your property.

Why can capital cost allowance (CCA) cost you your tax elections?

As soon as you, your spouse, or a trust of which you are a beneficiary claim capital cost allowance on the property for any year after 1984, the 45(2) and 45(3) elections become impossible. CCA offers an immediate tax benefit, but it closes the door to deferral and triggers a recapture on disposition.

Capital cost allowance (CCA) is one of the most misunderstood tax trade-offs for multi-unit owners. It lets you deduct part of the building's cost (not the land) against rental income each year, reducing tax in the short term. But for the owner-occupant who wants to preserve the flexibility of a change of use, it carries a major hidden cost.

CCA closes the door to the 45(2) and 45(3) elections

The rule is clear: if CCA has been claimed on the property for any tax year after 1984, the 45(2) election (residence → rental) and the 45(3) election (rental → residence) are no longer available. That is why many plex owners planning to occupy then rent (or the reverse) deliberately avoid claiming CCA on the rental portion. They give up a modest annual deduction to keep a far more powerful deferral lever.

Recapture of CCA on disposition

Claiming CCA has a second consequence. On disposition — actual or deemed — if the building's value exceeds its depreciated value (undepreciated capital cost), the CRA and Revenu Québec "recapture" the CCA deducted: this is recapture, fully taxable as income (not as a capital gain, of which only half is included). A change of use can therefore trigger both a capital gain and a recapture, a costly double effect.

A trade-off to make early

The decision whether to claim CCA is ideally made before any change of use, and often as early as the first year of rental. An owner who plans to take back a unit of their triplex in a few years, or who might want to sell using a principal residence designation, has an interest in preserving their options. Conversely, an investor holding the property long-term with no planned change of use may find CCA advantageous. It is a personalized calculation.

Source: Canada Revenue Agency — Changing your property (election conditions).

What are the most common mistakes on a change of use?

The costliest mistakes are: ignoring that a change of use is a taxable event, failing to document the fair market value at the right date, claiming CCA without weighing the impact on the elections, missing the deadline to file the election, and confusing partial and total change of use in a plex.

Change of use is an area where plex owners make mistakes out of unfamiliarity, often in good faith. Here are the most common traps and how to avoid them.

Mistake 1 — Believing there is no tax without a sale

The fundamental error: thinking no tax can apply until you have sold and received an amount. The deemed disposition contradicts exactly that intuition. The tax authorities calculate the gain as if the sale had occurred, at FMV, in the year of the change.

Mistake 2 — Not fixing the FMV at the right time

Many owners wait until the actual sale, years later, to worry about value. But it is the FMV at the change-of-use date that matters, and it is very hard to reconstruct retroactively. An appraisal made at the right time is worth its weight in gold.

Mistake 3 — Claiming CCA without weighing the consequences

Claiming CCA "because it reduces tax this year" can cancel the possibility of the 45(2)/45(3) elections and create a future recapture. It is a trade-off, not an automatic reflex.

Mistake 4 — Missing the deadline to file the election

The election is attached to the return for the year of the change. Filing it late, or omitting it, greatly complicates matters: although the CRA sometimes accepts late elections under conditions, you should not count on it. Respect the deadlines.

Mistake 5 — Confusing partial and total change in a plex

In a quadruplex where you live in one unit, renting a second previously vacant unit is not the same as leaving the building entirely. The first is a partial change on a portion; the second, a total change. The calculation and elections differ.

Source: Revenu Québec — Change of Use.

How do you solidly document your plex's fair market value?

Documenting the FMV at the change of use rests on three pillars: a recent certified appraisal, sale comparables in the sector, and the income capitalization method (cap rate) for the rental portion. A thorough file protects your reference tax cost and limits disputes on a future sale.

Fair market value is the heart of any deemed disposition. Since no actual sale fixes a price, it is up to you to demonstrate the value used. A weak file exposes you to a reassessment: the CRA or Revenu Québec may challenge an FMV that is too low (reducing the gain reported at the change) or too high (inflating your reference cost and reducing the gain on the future sale).

Pillar 1 — The certified appraisal

An appraisal by a certified appraiser made as close as possible to the change-of-use date is the most robust evidence. It describes the property, its location, condition, and income, and applies recognized methods. For a plex on the North Shore, it is especially useful because values vary widely from one sector to another — Terrebonne, Mascouche, Blainville, Sainte-Thérèse, and Saint-Jérôme do not move at the same pace.

Pillar 2 — Market comparables

Absent a certified appraisal, a file of comparables — recent sales of similar plexes in the same sector, within a few months of the date — supports the value used. Note the addresses, prices, dates, number of units, and condition of the compared buildings.

Pillar 3 — Income capitalization (cap rate)

For the rental portion, the net income capitalization method divides the net operating income by a capitalization rate specific to the sector. This approach, standard for income properties, values the rented portion consistently with the investor market.

Source: Revenu Québec — Change of Use (disposition at fair market value).

How do Québec's rules differ from the federal ones?

The mechanism is harmonized between federal and Québec: deemed disposition at FMV, deferral election, principal residence designation up to 4 years. The difference is in the legal references — subsections 45(2) and 45(3) of the Income Tax Act federally, sections 284 and 286.1 of the Taxation Act in Québec — and the dual filing required.

Québec administers its own income tax system, distinct from the CRA's. For a change of use, the good news is that both systems are largely harmonized on substance: same deemed-disposition principle, same deferral elections, same principal residence designation period. But a plex owner must file their elections at both levels.

The dual filing

Concretely, if you make a 45(2) election federally, you must make the corresponding Québec election under section 284 of the Taxation Act. For the federal 45(3) election, the Québec counterpart is section 286.1. Each election accompanies the corresponding return (federal to the CRA, provincial to Revenu Québec).

This symmetry simplifies planning, but it demands rigor: forgetting the Québec side of an election made federally can create an inconsistency between your two returns. An accountant familiar with Québec income properties ensures both sides match.

Sources: Revenu Québec — Change of Use (s. 284 and 286.1); CRA — Changing your property.

How do you plan a change of use ahead of selling your plex?

Planning means choosing the timing of the change of use, preserving your tax elections, documenting the FMV, and coordinating the sale. An owner who anticipates the deemed-disposition impact gets a more predictable net price and avoids nasty tax surprises at closing.

Many North Shore multi-unit owners consider a change of use as a step toward a sale: taking back a unit to live in before selling, or conversely fully clearing the building. The sequence of these moves directly influences the final tax. Here is how to think about planning from the owner-seller's point of view.

Sequence the moves in the right order

Making a change of use just before a sale can crystallize a gain at a bad time, or conversely, if well planned, let you use a principal residence designation. The order — occupy then sell, or sell directly — has distinct tax consequences. It is a trade-off to model with a tax specialist before acting.

Preserve the net value

From the seller's standpoint, what matters is the after-tax net price. A capital gain and, where applicable, a CCA recapture eat into the sale proceeds. Knowing these amounts in advance avoids overestimating what the sale will actually yield.

ImmoMulti, as a direct buyer of North Shore income properties, regularly meets sellers who discover the tax impact of a change of use late. A well-prepared file — documented FMV, elections filed, anticipated net calculated — makes the sale smoother and the net price more predictable.

Source: Revenu Québec — Change of Use.

When does a small or partial change of use not trigger a deemed disposition?

The CRA provides that if a change in use of part of a property is ancillary to its main use, small in scale, and no CCA is claimed, you may not need to report a deemed disposition. This de minimis relief is narrow and case-specific — a plex owner should not assume it applies without professional validation.

Not every small adjustment in how you use your plex forces a deemed disposition. The CRA recognizes that a minor, ancillary change in use of part of a property need not always be treated as a change of use for tax purposes. Understanding the boundaries of this relief helps a North Shore owner-occupant avoid over-reporting — and, just as importantly, avoid under-reporting a change that does count.

The conditions of the de minimis relief

According to the CRA, you are generally not considered to have a change of use — and therefore no deemed disposition arises — when all of the following hold for the part of the property whose use changes:

• the income-producing (or personal) use is ancillary to the main use of the property;
• there is no structural change to the property to accommodate the new use;
• no CCA is claimed on the property.

Where these conditions are met, the entire property can keep its original character — for instance, remaining eligible for the principal residence exemption — without recognizing a partial disposition. This is a targeted relief, not a general escape hatch.

Why plex owners must be careful

In a duplex, triplex, or quadruplex, the rented units are rarely "ancillary" — renting out entire units is a substantial, ongoing income use, not an incidental one. That is why a full unit changing use in a plex will typically be a genuine change of use with a deemed disposition on that portion, while renting a single room incidentally within your own dwelling might fall within the relief. The distinction is factual and delicate.

Source: Canada Revenue Agency — Changing part of your principal residence to a rental or business property (and vice versa).

Informational content only. Does not constitute legal or tax advice. Tax rules and thresholds may change. Consult a tax specialist, accountant, or notary for advice specific to your property and situation.