Summary of CRA technical interpretation 2022-0923881I7

Overview

As personal tax season has arrived, we thought it might be helpful to discuss a recently published technical interpretation from CRA (2022-0923881I7) covering a subsection 45(3) change in use election.  Of the four questions asked of CRA, three could be very relevant to your practice. 


  • Subsection 45(3) of the Income Tax Act allows a taxpayer to defer the capital gain that would otherwise arise when a property changes use from income-producing to principal residence.

  • Absent the election, paragraph 45(1)(a) deems a disposition and immediate reacquisition at fair market value, potentially triggering a capital gain.

  • When a valid subsection 45(3) election applies, the property may be designated as the taxpayer’s principal residence for up to four years prior to the change in use, even if not ordinarily inhabited.

Question 1 – Timing of the subsection 45(3) election

  • The election must be filed on or before the earlier of:

    • 90 days after a demand by the Minister, and

    • The taxpayer’s filing-due date for the year in which the property is actually disposed of.

  • Because the property had not yet been disposed of, filing the subsection 45(3) election with the 2017 income tax return (for a change in use that occurred in 2014) is not considered late.

  • Limitation: If capital cost allowance (CCA) had been claimed on the property, subsection 45(4) would deny the subsection 45(3) election.

Question 2 – Revoking the subsection 45(3) election

  • Subsection 45(3) itself does not allow unilateral rescission of the election.

  • A taxpayer may request permission from the Minister to revoke the election under subsection 220(3.2), subject to CRA discretion and section 600 of the Regulations.

  • If approved, the election is deemed never to have been made.

  • CRA administrative policy (IC 07-1R1) allows acceptance of late, amended, or revoked elections, even after the normal reassessment period.

  • Requests must generally be made within 10 years of the year in which the election was required.

  • Penalty relief: No penalty applies where the revocation request is made before the election’s filing deadline, which appears to be the case in this scenario.

Question 4 – Deadline for the election on death of the taxpayer

  • On death, subsection 70(5) generally deems the taxpayer to have disposed of capital property immediately before death at fair market value.

  • This deemed disposition is considered an “actual disposition” for purposes of paragraph 45(3)(b).

  • Accordingly, the latest filing deadline for a subsection 45(3) election is the filing-due date of the deceased’s final return (2019 in the facts provided).

  • Filing the election at that time allows the property to benefit from the additional four principal residence years, assuming all other conditions are met.