QUESTION: We have recently moved out of our home of 16 years. Due to market conditions it has not sold and became a rental in November 2002. I have heard something about being able to claim it as our principal residence for up to three years in order to save the capital gain. Also should we have an appraisal done to set its value for taxation purposes.

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david ingram replies:

In CANADA

When you move out of a property and rent it out, it is considered a "change of use".  At that point, any increase in value becomes a taxable capital gain UNLESS you designate the home to be your principal residence for up to four more years.

This means that you can "try" an apartment for a couple of years and move back in later on and not have to pay a capital gains tax if the property has increased in value.

If you move as the result of a job transfer, there is no restriction on the number of years.  If you had left your house in Chilliwack in 1983 when it was worth $100,000 and you are moving back in now when it is worth $300,000, there is no tax liability IF you signed a declaration under section 45(2) of the tax act every year you were gone.

A real restriction is that to claim the Chilliwack house tax free, you cannot claim any other house tax free.  So, if you had bought a house in Toronto and it went up $400,000, you would be claiming the Toronto home tax free and be prepare to pay tax on the Chilliwack house.

Technically, if you did claim the Toronto or Victoria or Winnipeg home tax free you would owe tax on the Chilliwack house went you moved into it.

However, you can file another election under Section 45(3) of the tax act to defer paying the tax until you actually sell the house.

So, if you have bought another more expensive house, it is unlikely that you would want to claim the old house tax free for the next four years.

On the other hand, if you moved out and are renting somewhere else, you would file a 45(2) election each year with the rental statement on your tax return.

There is no official form.

You merely say:     "I hereby elect under Section 45(2) of the income tax act to designate this property to be my principal residence even though I am not living in it.

When you do sell and have to calculate the taxable profit (if any) you need to fill out a Form T2091.

You can find the form and print it out at http://www.ccra-adrc.gc.ca/E/pbg/tf/t2091_ind/README.html

Hope this helps