The Canada Revenue Agency recently wrote about a whether a late-filed election to retain the principal residence status will be accepted.

When the use of a property that is a principal residence is changed from being owner-occupied to a rental property the CRA considers the owner to have sold and reacquired the property. This action may trigger a taxable event which may be covered by the principal residence exemption. More importantly, the increase in value from the time of change and on is now taxable to the owner at the time of disposition or otherwise. The owner may chose to retain the principal residence status of the property during the rental period if he or she files an tax election in the tax return for the year in which the change of use occurs.

The CRA was asked to weigh in on a situation where an elderly taxpayer left his home for the comfort of nursing home where he died. During his stay in the nursing home the property was rented to an unrelated party. The taxpayer did not file the tax election to retain the principal residence election. His executor’s wondered if a late-filed election would be valid and accepted.

The CRA took the view the fact that an executor that the late-filed the subsection 45(2) election on behalf of a deceased taxpayer, would not, in and of itself, prevent the CRA from accepting the election. However, a late-filed election accepted by the CRA may be subject to a penalty of up to $8,000.

A late-filed election may or may not be of value if the tax to be saved is less than the penalty for late filing.