Moving into House Triggers capital gains tax with next tax return unless section 45(3) used

QUESTION: Hi. My husband and I own a home in toronto. We lived in it for 4 years before he accepted work in Germany. We rented it out thinking we will only be away for 2-3 years. We have now been away for 6.5 years. It is still rented. In the last year my husband was transfered to the U.S. I have been paying Canadian taxes over this time period. My principal residence is considered at my parents' home, to simplify post pick-up.

We are now considering buying a home in the U.S. and would like to sell our Toronto home. Do I need to live in the house again, or can I sell it without incurring the capital gains tax? We have not yet bought another home and are renting ourselves.

david ingram replies:

There is nothing you can do to make the house tax free. It has been subject to Capital Gains Tax since the moment you left Canada. Moving in triggers an immediate tax liability unless you make an election in writing under Section 45(3),. For years, the CRA accepted the election on line 256 of the return as in writing, but we suddenly have one where they have not accepted it so my suggestion is that the election must be made in writing on a separate piece of paper.

This older question points it out in other words.

My question is: Canadian-specific
> QUESTION: We in the process of purchasing a house in Penticton and will rent it out, retire (in about 4 years)and move into it ourselves. If we live there for 2 or more years are we liable for capital gains for the period we collected rental income? What type of home insurance is best for a rental property? What are your thoughts re the real estate market in the Okanagan in the next five years - steady growth or a slump after "2010"? Many thanks, Jacalin
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> david ingram replies:

You are liable for capital gains income tax for the period you rented it out. In fact "When you move into the house", you will trigger a capital gains tax because of a change in use from a business use to a personal use.
The good news is that you can make an election under Section 45(3) of the income tax act to defer paying the tax until you actually sell the property. To make the calculation, fill in schedule 3 and put the taxable profit on line 127 of your T1. then deduct the same amount on line 256 under Section 45(3).

I think the Okanagan AND the lower mainland markets are already overheated and think the prognosis is for little or no growth for the next five years but I have been wrong before.

That does not mean you should not buy because if I am wrong, it will cost so much more to buy six or seven years from now that you will be cursing me all the way to the mortgage broker. If you buy and it goes down a bit, it does not matter because you are buying it to live in and that gives you the property in the future at today's price which is historically lower.