This is a guest article from Kerry, a soon to be Chartered Accountant, who has tips for those who want to convert a principal residence to a rental property.

From a young age many of us aspire to own a home. Historically, the investment benefits of home ownership have been fairly significant, particularly here in British Columbia. While many of us are content owning the home we live in, others want more of a good thing choosing to buy one or more rental properties. If you are contemplating joining this latter group, you’ll want to ensure you don’t make the “big mistake”. Actually, the “big mistake” could just as easily be called the “common mistake” given the frequency with which it occurs.

A Common Tax Mistake

So what exactly is the “big mistake”? The “big mistake” assumes many forms but a fairly simple example can be used to illustrate the problem.

With help from her bank Miss Take purchased her principal residence a number of years ago. A lot of hard work and countless mortgage payments later Miss Take is now mortgage free. As is often the case, Miss Take finds that the old house isn’t really satisfying her needs anymore and she’s looking to move to a bigger and better home. The old home has increased substantially in value and Miss Take has developed a certain affinity for the place so she has decided to keep the house and rent it out.

Relying on her equity in the old house, back to the bank she heads to take-out another mortgage on the old place to buy her new home. The mortgage interest paid on the old house will go a long way in sheltering from income tax the rent Miss Take receives. It should be smooth sailing ahead, or so she thinks.

Everything seems just fine until Miss Take pays a visit to her accountant to get her personal tax return completed. After reviewing the facts, the accountant has determined that Miss Take has fallen victim to the “big mistake” – what seemed like very logical steps to follow at the time have left Miss Take with taxable rental income but non-deductible mortgage interest – clearly not the most desirable outcome.

What do you mean non-deductible interest? She did borrow against the rental property after all, didn’t she? How can this be?

A Backgrounder

The error in Miss Take’s game plan is her assumption that conversion of her former principal residence to a rental property and placing a mortgage on that same property to buy her new home will result in tax deductible interest. Unfortunately for Miss Take, this is not the case. Although greatly simplifying the issue, provided the amount is reasonable, interest paid is generally deductible for income tax purposes under the following conditions:

  1. The interest was paid or payable in the year in accordance with a legal obligation, and
  2. The borrowed funds were used for the purpose of earning income from a business or property – the term “property” referring to interest income, dividends, rents and royalties but not capital gains.

The first condition rarely causes problems because most loans are properly supported by a written agreement but the same can’t be said for the second condition.

The Canada Revenue Agency has produced an Interpretation Bulletin, IT-533 Interest Deductibility and Related Issues, which provides its interpretations of the deductibility of interest expense under various provisions of the Income Tax Act and the judgments in numerous court decisions involving the deductibility of interest expense.

The Bulletin states that “the test to be applied is the direct use of the borrowed money. In certain circumstances, however, the courts have stated that indirect use will be accepted as an exception to the direct use test.

In determining what borrowed money has been used for, the onus is on the taxpayers to trace or link the borrowed money to a specific eligible use, giving effect to the existing legal relationships.”

Applying this “trace or link” test to Miss Take’s situation it’s clear that the borrowed funds were used to purchase her new principal residence. The fact a rental property was used as collateral for her loan is of no consequence; all that matters is the use made of the borrowed funds. In this case, she clearly used the borrowed funds to purchase her new principal residence and, as we all know, interest paid on debt incurred to purchase a principal residence is not deductible for income tax purposes. The end result for Miss Take will be taxable rental income and non-deductible interest expense – clearly not a very good outcome.

The problem here is the taxpayer has confused the security for the new borrowing with the use of the borrowed funds. In this case, the security for the loan does not matter – it’s the use of the borrowed money that counts.

The Solution

So what could have been done differently here to provide tax deductible interest expense for offset against the rental income received? Consider the approach taken by Rita Ohn who has paid-off her existing home and now wants to buy a new home and commence renting her own home. Knowing the importance of “tracing” in the deductibility of interest, Rita took the following steps, in order, and at fair market value:

  1. On day one, Rita sold her current home (the “old home”) to her parents for fair market value. Rita’s parents paid for the purchase by issuing a promissory note to Rita. Always concerned about property transfer tax and other matters, Rita discussed this series of transactions with her lawyer who ensures all steps are properly documented;
  2. On day two, Rita reacquired the “old home” from her parents by borrowing from the bank on the security of a mortgage. Rita plans to use the “old home” as a rental property;
  3. Rita’s parents use the funds received to repay the promissory note they issued to Rita on day one, and
  4. Rita then uses the funds received from her parents to purchase her new home.

When the dust settles, Rita owns a rental property (the former “old home”) and she also owns a new home. Following the “tracing” principle Rita can clearly show that the money she borrowed was used to purchase a rental property and, therefore, the interest paid should be deductible against the rental income she receives in the calculation of her taxable income.

This example shows that a few simple steps can result in a very different outcome – in Rita’s case, an outcome that provides her with tax deductible interest expense.

Submitted by CA Student:  Kerry works in British Columbia as an articling student with Meyers Norris Penny LLP. He obtained his Bachelors of Business Administration in 2010 and plans to write his Uniform Exam (UFE) this September to obtain his Chartered Accountant designation. He enjoys reading and learning about all aspects of personal and business finance.


  1. Oli on February 4, 2011 at 9:20 am

    Hi Kerry,

    Great post! So does this basically mean 2 property transfer (for the “old home”) incl. all legal & tax-related fees (lawyer, land transfer, etc)?

    Would any proof of fund be required from the parents to whom the property was “sold”?

  2. brokeprofessionals on February 4, 2011 at 10:18 am

    Interesting. I wonder if Canada has a “like kind” exception. In America, you generally (I believe and I am not a tax expert) purchase a property with funds from the sale of a prior property (so like as it is similar: i.e. a “like/kind” purchase) and avoid any capital gains on the property up to a certain point. (I believe those gains may be rolled as a tax basis into the new house but again I could be dead wrong about that).

  3. Oli on February 4, 2011 at 11:03 am

    @brokeprofessionals what you’re referring to is also know as a “1031 Exchange” and I don’t believe is available in Canada.

    It’s simply (though great!) a roll-over of capital gains from the sale of one property into another one that you buy with the proceed of the old property. The new has to have at least an equivalent market value but it can be much higher too.

  4. matt on February 4, 2011 at 11:29 am

    Sounds like a pretty good loop-hole in the system. Do you think the government will ever encourage something like this by make it ‘easier’?

    I am guessing probably not, because they like the tax income.

    This is a great post, especially for someone who has been thinking about doing this for a long time!

  5. Oli on February 4, 2011 at 11:51 am

    @matt I don’t think this is a loop-hole.

    The only thing in this case though, if I’m not mistaken, is that because the “old home” is re-bought as an investment property, the new mortgage rules (from last year) would require that you put at least 20% of the new value (price at which it was “bought” from the parents) as downpayment.

    Let’s try with actual numbers: first home was purchased for $200K then “sold” to the parents at fair market value of $300K and “re-bought” for the same amount. This $100K of capital gains is tax free since it is on a Principal Residence. In order to get a mortgage on the “old home”, you would have to put in at least $60K worth of equity.

    The rest ($40K in increase value + whatever pay down on the original mortgage) can be used towards the new home. I think the story calls for a paid off home so that would give $240 towards the new home (assuming you put the minimum required of 20% equity into the rental “old home”).

    I hope this makes sense… and as far as I understand it, it means you’d have to quality for 2 mortgages “in a row” if the new home is more than $240K.

  6. No Debt Guy on February 4, 2011 at 12:16 pm

    The 20% wouldn’t be a big deal because you would need that much down to avoid CMHC fees anyhow.

    In that situation it may not be hard to carry to mortgage as you have the rental income to supplement your personal income.

  7. DavidV on February 4, 2011 at 12:43 pm

    I guess the big issue would be land transfer taxes, and other fees. I can see that being an issue. In Toronto you’d pay $5,700 in land transfer fees for a $300,000 house. I would assume you’d pay $5,700 twice, once when your parents bought the house, once when you bought it back.

    I do love the idea though.

    Could you take a large mortgage on your rental property and buy your new one. Then get a HELOC or similar on your new house to pay down the debt on your rental property. It’s my understanding that this would work, since you’re using the money towards the rental property.


  8. Walter on February 4, 2011 at 1:02 pm

    The steps sounds simple enough. I’m wondering about all the fees (lawyers, taxes, etc…) involved in accomplishing the steps. Anyone have the ability to clarify this?
    This is the exact situation I may be facing in the next 6 months so I am very interested.

  9. Miss T @ Prairie EcoThrifter on February 4, 2011 at 1:16 pm

    Thanks for the clarification on this topic. My hubby and I have often talked about converting our home into a rental once we outgrow it and want to expand. Knowing the fine print details of the process is very helpful. Thank you.

  10. Andrew F on February 4, 2011 at 1:28 pm

    The x2 land transfer+legal fees make this proposition sound a lot less appealing. It might be better to use a cash dam instead.

  11. CA Student on February 4, 2011 at 1:47 pm


    You would want the 20% down anyways to avoid the mortgage insurance fees. Also, the mortgage proceeds and downpayment that you get to purchase the home from your parents actually come right back to you as they are repaying the promissory note they issued to purchase the house in the first place.

  12. CA Student on February 4, 2011 at 1:51 pm

    @ DavidV

    Taking a mortgage on your rental property to buy a principal residence would not work. When CRA asses the situation they would see that the proceeds were used to purchase a principal residence and therefore the interest would not be deductible for tax purposes.

  13. CA Student on February 4, 2011 at 2:00 pm

    @ Andrew F

    In this situation there are ways to avoid paying the property transfer tax twice. Usually this is done via a trust, however it would be best for someone to consult with their lawyer on this matter.

  14. DavidV on February 4, 2011 at 2:11 pm

    CA student, thanks for the response, but I guess I wasn’t being as clear as I wanted (or maybe I was just wrong):

    Day 1: Take a $200,000 mortgage on your rental property to buy your new house. This money is not deductible on day 1.

    Day 2: Take a $200,000 HELOC loan against your new house to pay back the mortgage on your rental property.

    Day 3: You have a $200,000 HELOC and the proceeds were used to payback a loan on your rental property. Would the attribution rules not see that the money was used to increase your ownership of a rental property (by paying down debt for your rental property) and therefore be deductible?

  15. Patrick on February 4, 2011 at 2:41 pm

    This sounds like tax evasion to me and I’m sure that if the CRA looked into it they could make a case for it against both the parents and the buyer.

  16. Xenko on February 4, 2011 at 5:22 pm

    Wouldn’t this work-around be breaking the CRA’s General Anti-Avoidance Rule?

  17. Chris L. on February 4, 2011 at 6:10 pm

    DavidV. I was looking at that as a solution as well. I can’t see why it would not be tax deductible. What CRA is looking for is WHAT the money is used for. If you mortgage your house to invest, then it’s tax deductible. If you pay down a mortgage on a rental is it used for investing or personal use?

    In this case, your new loan was used to purchase an investment, or in other words pay down debt. I would think this qualifies. Would be interested to hear other opinions.

  18. Chris L. on February 4, 2011 at 6:12 pm

    With the stated scenario, are there any land transfer taxes due?

  19. Jungle on February 4, 2011 at 7:44 pm

    Coles notes version:

    You can’t deduct money used for a principal residence purchase.

    Better solution:

    Get rid of the renal property; after the mortgage is paid, they are not tax efficient.

    With the funds, buy a REIT, you’ll have better yield and is taxed more efficiently.

    /end comments.

  20. CA Student on February 4, 2011 at 8:24 pm

    @Chris L. & @DavidV

    In this situation you have used the funds to buy a new principal residence. Any new borrowing to repay the original mortgage will be considered to have been used for the same purpose.

    Subsection 20(3) of the Income Tax Act:
    Borrowed money — For greater certainty, if a taxpayer uses borrowed money to repay money previously borrowed, or to pay an amount payable for property described in subparagraph (1)(c)(ii) previously acquired (which previously borrowed money or amount payable in respect of previously acquired property is, in this subsection, referred to as the “previous indebtedness”), subject to subsection 20.1(6), for the purposes of paragraphs (1)(c), (e) and (e.1), subsections 20.1(1) and (2), section 21 and subparagraph 95(2)(a)(ii), and for the purpose of paragraph 20(1)(k) of the Income Tax Act, Chapter 148 of the Revised Statutes of Canada, 1952, the borrowed money is deemed to be used for the purpose for which the previous indebtedness was used or incurred, or was deemed by this subsection to have been used or incurred.

    I know that this is a bit technical but it is basically saying that the HELOC that you used will be deemed to have been used for the same purpose of the original mortgage which is to purchase a principal residence.

  21. CA Student on February 4, 2011 at 8:27 pm

    @ Jungle
    You can’t deduct money used for a principal residence purchase.

    Get rid of the renal property; after the mortgage is paid, they are not tax efficient.

    Both statements are true, however in the above solution you will have a mortgage that will be tax deductible.

  22. Ticker on February 5, 2011 at 1:51 am

    What about setting up a corporation to purchase the old house from myself through a mortgage to the corporation. Would fit the attribution rule, could share ownership with spouse/children. Issue dividends instead of income and possibly capital gains exemption from small business once I sell the property.
    Also protects me from any personal liability on the house. Obviously the yearly accounting/auditting fees hurt. Just an idea, sure some holes in the idea any thoughts?

  23. DavidV on February 5, 2011 at 12:17 pm

    CA Student: Obviously I can’t disagree with the ITA. However, isn’t this exactly what Singleton did in Singleton v. Canada, [2001] 2 S.C.R. 1046?

    He took $100 from his law partnership capital account (i.e. the equity of the old house) and used that money to buy a house. He then mortgaged his house and paid back the law partnership. The Supreme Court of Canada said that this was fine and deductible.

    Otherwise, Ticker might have the solution, obviously you’d be hit with land transfer taxes, which is one if the issues we don’t like in the original solution.

  24. Jim Bob on February 5, 2011 at 1:03 pm

    I’d say go ahead and do this given the CRAs comments, but don’t be surprised if someday it gets denied.

    CRA’s Interpretation Bulletin blindly follows Serle. Serle blindly follows Singleton (plus the judge’s comments on his “proposed” transaction aren’t binding). Singleton did not consider GAAR (which you’ll see is an important consideration in Lipson).

    So definitely use at your own risk.

  25. Popsicle Pete on February 5, 2011 at 2:11 pm

    Have to agree with Jungle. Although it was stated that “Miss Take” likes her old house, and doesn’t want to get rid of it.

    Still, probably the best thing would be to sell the house for 300k, buy your new house with minimal mortgage, then take 300k out of HELOC on the new house and dump it into an REIT. Of course that’s getting into the argument of REITs vs individual ownership…a slippery slope.

  26. Ed Rempel on February 5, 2011 at 4:45 pm

    H Kerry,

    I have the same concerns as Patrick and Xenko. Would not GAAR apply here? In IT-533, CRA allows deductions “absent a sham”.

    If you sell your home to your parents and the immediately buy the same home back for the same price, what is your logic to support these being bona fide purchases and not a sham?

    Singleton involved buying a home and then mortgaging – 2 transactions that each have merit and legitimate purposes on their own.


  27. Nolan Matthias on February 5, 2011 at 7:50 pm

    This sounds like a great strategy, however I would be concerned if the CRA ever decided to audit. I would imagine that they would be able to make a pretty clear cut case on a non-arms length sale that would fall under the general tax avoidance rules. Just my humble opinion.

  28. FrugalTrader on February 5, 2011 at 8:16 pm

    That was one of my main concerns with this strategy, that it screams audit. However, on another note, this strategy is similar to what Jamie Golombek (tax strategist for cibc) has written about in the Financial Post.

  29. Scott Peckford on February 5, 2011 at 8:37 pm


    I do love the idea although I tend to agree with Nolan. I think there is a risk of being audited with this strategy. Plus in BC there is that nasty property transfer tax. I doubt this would be a great strategy here.

    I have a less elegant solution.

    1. Sell the current house
    2. Use the proceeds to buy a new principle residence
    3. Set up a line of credit on the new principle residence to purchase a different property as a rental.

    Of course the negative will be Real Estate fees on the sale of the current principle residence and property transfer tax would apply in some provinces, but it should hopefully avoid any problems with CRA. Also if you use the same Realtor for all three transactions then make sure you negotiate a sweet deal on the sale of your current home.

  30. Oli on February 5, 2011 at 9:02 pm

    @FrugalTrader do you have a link to that article?

  31. FrugalTrader on February 5, 2011 at 9:05 pm

    Yep, here it is:

    He explains why it “should” work with CRA at the bottom.

  32. Chris L. on February 5, 2011 at 9:06 pm

    Isn’t this just a giant load of poopies? I mean seriously, how literal do taxpayers need to be. Wouldn’t it just be simple if the tax law was amended for something that functioned better and designed to meant the intent of the tax law? 1031 would be nice to have around these parts too and tax deductible home mortgages while they are at it. This is all afforded to the rich anyway. It’s just a hook on the working class. Time to start reading up on tax law I guess. Just read the book on taking your money and running (to another Country). Interesting ideas, but a bit out for what I would consider doing. Canada as a homebase is fine, but we DO pay TOO MUCH IN TAXES!

  33. Oli on February 5, 2011 at 9:17 pm

    @FT thanks, the Financial Post entry is exactly the same as this one (for the working case).

    It ends with a quote from the CRA’s interpretation bulletin: “a taxpayer may restructure borrowings and the ownership of assets to meet the direct use test.”

    On a side note, note to @ChrisL… I’m from Belgium where notary costs (basically land transfer taxes) are 15% of the purchase price. Sales tax on new construction is the full VAT amount of 21%. So sure Canadian gvt should allow: 1031 exchanges and more definitely tax deductible home mortgage interests…. but we’re in a sweeter position than some other countries :))

  34. Sandy Aitken on February 6, 2011 at 12:15 pm

    Good discussion! Kerry’s Solution is similar to Jamie Golombek’s article. I had similar concerns when I first read it, so I spoke to Jamie last week and he said that he is unsure about GAAR. The real question here is: At what point might effective tax avoidance planning (which is both legal and prudent per Singleton, Lipson, Sherle) be considered “abusive” tax avoidance by the CRA under GAAR?

    In my opinion, the transactions proposed under Kerry/Golombek’s Solution will work for CRA interest deductibility per IT-533. I’m only unsure about the sale to the parents. An arm’s length sale might be safer.

    Also, I’ve looked into the possibility of avoiding costs related to legal registration and paying Land Transfer Tax (LTT). In Ontario, it would appear that LTT is payable on every unregistered disposition of land in any event. Therefore, since you must pay the LTT, you might as well register the property as well (twice). These costs will eat up some of the benefits. However, following through on each transaction takes away any potential CRA argument founded on the fact that a transaction was not legally effected.

  35. Oli on February 6, 2011 at 1:01 pm

    @Sandy I’m pretty sure that the 2nd LTT (the “buy-back” as a rental) would be considered a write-off since it is part of the cost of doing business (capital cost allowance)? Although I believe you could only write off the LTT related to the building (and not the land).

  36. Sandy Aitken on February 6, 2011 at 1:54 pm

    @Oli. It’s surprising to hear that Belgium LTT is 15% of your purchase price. Shocking actually. LTT is less than 2% in Ontario. I’ll defer to the accountants on what portion could be written off against rental income.

  37. js on February 6, 2011 at 8:51 pm

    My wife and I are from BC but we plan to move to Toronto.We have this 3 bedroom detached house in BC which we don’t wish to sell it but rent it. Also we plan to buy a house in Toronto. Any ideas what would be the best option for us?

  38. scott on February 6, 2011 at 9:26 pm

    js – It really depends on if you have a mortgage on the property in BC or not. I am not sure how much info you want to share, but I would think it would be good to know the following in order to give you any advice:

    1. How much do you on owe on the BC property?
    2. How much is the BC property worth?
    3. How much do you plan to spend on the Toronto property?
    4. Do you have other liquid non-registered investments?
    5. Where is the down payment coming from on the TO property?

    It is up to you if you want to share all this info or not. :) I understand if you don’t. If you do it would be interesting to see what type of advice you would get. :)

  39. js on February 6, 2011 at 11:13 pm

    I think I should have framed my question this way. Since we already own this as a principal property in BC I was wondering if we have to put in a 20% on the next one in Toronto even though we would call it home. A realtor in Toronto told us we would have to put only 5% provided I get a letter from my company of my relocation. I just wanted to get some expert opinion.
    We were thinking of converting the BC property into a rental one. If we do this then do we have to go through the process as described in the example of ‘Rita’?
    We plan to put 5% down on the property in Toronto. Not enough equity in the property in BC as we bought it in late 2008.

  40. scott on February 7, 2011 at 2:23 am


    I’ll answer this question in two parts. Since I’m qualified to answer the mortgage questions I’ll answer those first. Then I’ll give my, ‘armchair quarterback’ opinion on the tax stuff. I’m sure there are plenty of Accountants in this forum who can correct me if I’m wrong on the tax stuff. :)

    Mortgage Stuff

    The minimum down payment is still 5%. However after March 18, 2011 the maximum amortization will be 30 years instead of 35. This may or may not make any difference to you.

    The longer amortization will allow you to qualify for about 7.00% more mortgage. I don’t normally recommend taking the absolute maximum mortgage anyway.

    As for qualifying for the new mortgage with 5% down here are few things to consider.

    1. If you are putting 5% down you will have to pay CMHC premiums

    2. If you are being transferred with your job then it should be no problem to use your income. (If you are on probation in Toronto you may have to wait)

    3. If you want a variable rate you will be qualifying at 5.19%. Which is much higher than current fixed rates or variable rates.

    4. If your debt servicing is tight. How your lender treats rental income is going to make a big difference. (Not every lender treats rental income the same way)

    Tax Stuff -(Accountants feel free to jump in)

    As for converting your principle residence into a rental I don’t think you need to ‘Rita’ your property. In BC you would trigger a bunch of tax that would just go to pay Gordon Campbell. It is my understanding if you convert the property to a rental you could begin deducting the interest on that property.

    The strategy Kerry is writing about is really for someone who has all of their equity stuck in their house and wants to take it out tax efficiently. I would assume since you bought in 2008 you probably don’t have a pile of equity. I bought a property in 2008 as well so I know how you feel. :(

    I would also suggest getting an appraisal on the BC property. That way you have a record of how much it was worth when you converted it to a rental property. (You don’t have to do this but my Accountant recommended I do it and I think it is not a bad idea) It allows you to show CRA what it was worth when you changed it’s use if you ever do sell.

    If you have any other questions please post them.



    Oh, and yeah Packers!

  41. FrugalTrader on February 7, 2011 at 9:59 am

    @js, besides what was mentioned above, are you sure you want to be a landlord to a property in another province? Do you know and trust a good property manager?

  42. js on February 7, 2011 at 8:33 pm

    Scott – thanks for the elaborate post. I must admit that I would have bought a property in Toronto (for myself) and converted the property in BC into a rental had I not read about this post, although I follow this blog regularly! I understood your 4 points however I didn’t get the 3rd one – I’ll be qualifying at 5.19% for a variable rate?

    With regards to deducting interest on the rental property we have done that earlier on our rental properties but after reading this post I wasn’t sure if I could convert my principal residence into a rental one and buy a principal residence in another province. Another mortgage broker in Toronto said I could do it provided I have the letter from my firm about my transfer. So – I’ll agree what you too stated.

    Immediately after buying this property in Dec’08, my wife and I renovated the walk out basement (coincided with the home reno credit which we claimed!)and rented it out to generate passive income. We also got an appraisal done and refinanced it when the interest rates were record low. We bought for 320k and the appraised value is 355k as of last year. I am assuming it is around that number today.
    I’ll have to talk to my accountant and ask if I attract any other taxes.

    FT – I feel the same as you think. It is certainly not comfortable to be a landlord to a property in another province. We have rented out our townhouses after doing a good check of our tenants. But we have no option. The numbers don’ t work out after appointing a propery manager to look after the property. With our latest experience (we found and placed the tenants ourselves just) we didn’t have a great experience with the property manager. In case the tenants give us a notice we are thinking of appointing a property manager to fill the place. I would still look for a good property manager to work with – long term.

  43. Clancy on February 7, 2011 at 9:52 pm

    To JS..
    what Scott was talking about with the qualifying at 5.19% for a variable rate is this.
    According to the (not so) new CMHC rules any customers wishing to have a fixed term mortgage of less than a 5 year term or a variable/adjustable rate mortgage must qualify at a benchmark rate set by CMHC. This rate is currently 5.19%. You will still make your payments based on whatever the current variable rate is. (Prime -0.7% as example) but you have to qualify at the higher rate to allow for movement in the BOC prime rate. If you want a standard 5 year fixed mortgage you qualify at the 5 year rate 3.89% today.

    Does this make more sense?

  44. Scott Peckford on February 7, 2011 at 10:15 pm

    js – I guess #3 may have been a little cryptic. :) I’ll explain what I mean.

    If you want a variable rate mortgage and are putting less than 20% down you must qualify at much higher rate. Currenlty the qualifying rate is 5.19% while a decent variable rate mortgage is closer to 2.25%. The reason CMHC requires this is because they don’t want borrowers to be in a variable rate mortgage and suddenly not be able to afford the payments because the rate went up. (Not a bad thing in my opinion)

    I wasn’t sure if you were going to opt for a variable rate or fixed rate. So I included #3 to let you know if you had trouble qualifying for a variable rate it may be because of this higher qualifying rate. (A fixed rate can be easier to qualify for.)

    In hindsight I probably should have just left it out since it was probably confusing and if you are going into a fixed rate mortgage on the Toronto property this info would be irrelevant.

    My bad. lol

  45. js on February 8, 2011 at 12:32 am

    Clancy & Scott – thanks for making it clear to me!

  46. Barossa Tours on February 8, 2011 at 7:27 am

    The reason CMHC requires this is because they don’t want borrowers to be in a variable rate mortgage and suddenly not be able to afford the payments because the rate went up. (Not a bad thing in my opinion)

  47. et on February 10, 2011 at 7:19 pm

    Hello… this is a timely post for our family. We are new homeowners, I bought a condo 2 years ago.

    Real estate is taking off in our area and our agent is advising us to rent out the condo in a few years when we plan to upgrade to a family-sized house.

    Maybe some of the knowledgeable folks here can clarify something for me:

    Right now, our mortgage of approx 127K is in my name only. Our agent suggested my SO be the sole ‘purchaser’ of our house (in 3 years when we have the 20% down payment ready to go).

    He says that way we can rent out the condo for a few years and sell it as “my” primary residence and avoid the capital gains tax.

    This sounds too easy to me. Can this be right?

    Any advice on how best to protect the condo gains would be appreciated. We are trying to learn as much as possible before even deciding to be landlords!


  48. Sue on February 11, 2011 at 3:38 am

    Hi, these are great ideas. I have a question. If my husband already shares ownership with his parents in the principal residence. Not intending to sell this house. However want to invest in new house, probably a rancher etc, and get rental income and hold the new one as an investment. Looking forward to pay 20% down and borrow rest of amount. What will be best way to avoid property transfer taxes and also tax on rental income from new house? Thanks in advance

  49. Scott Peckford on February 11, 2011 at 7:54 pm


    It is a little unclear from your post, but if I understand you correctly. Here is how I would answer. If you sell a principle residence you do not have to pay any capital gains.

    My accountant suggested we get an appraisal on the property when we moved out. That way we have an idea of what it was worth when we converted it to a rental property.

    Here is an example to help you

    If you buy a property for $100k and live in it for 2 years and it is worth $120k when you turn it into a rental you should not have to pay capital gains on the $20k increase. (Since you were living in it during the increase) If the property continues to increase in value and you sell it 2 years later for $130k it is my understanding you could be liable for the $10k gain from $120k to $130k because it was a rental property. That is why my accountant suggests you get an appraisal.

    I have heard of claiming a rental as a principle residence and since i am not an accountant I am not going to comment. It is my opinion you should check with your accountant on this. Don’t trust, ‘Armchair quarterbacks’ in forums, including me. Since ultimately it is your money and your tax bill. :)

    However, I still think the appraisal is a good idea to avoid any disputes with CRA in the future.

    There is one other thing and maybe this applies to you. If you are in BC and your significant other has never owned a property before then there are some strategies you could use when you buy the next place to avoid/reduce your property transfer tax.

    Let me know if you are in BC and if your significant other will be a first time buyer and I’ll give you a couple ideas.


  50. et on February 14, 2011 at 7:15 pm

    @Scott P…

    Thanks for the advice… the appraisal sounds like a good move. I never would have thought to do that. Your example makes sense to me and also makes me feel better about the situation. I’m not looking to evade taxes! I just don’t want to pay more than I have to… (obviously).

    We are not in BC… we are in Nova Scotia…but my significant has never owned a property before.

    Once again, thanks for the response. :)

  51. Small Capitalist on March 3, 2011 at 7:35 pm

    Great post with lots of ideas!! We live in Regina, Saskatachewan and rental market is great here – thanks to Saskatchewan Booming Economy.

    Recently we have been thinking about moving to outskirts of the city and live in an acerage. We were not sure if we should rent our existing principal residence or sell it. I will check with my accountant and see what he thinks about this strategy.

  52. InMe on March 26, 2011 at 12:58 pm

    I have a condo and am looking to convert it into a rental using this system. Most of these examples I read are from people who have already paid off their mortgage, but the difference for me is that I still have a mortgage. I know this gives me other options as I could write off the interest on the current mortgage starting at the time of change in use, but I would like to pull the equity out to purchase a new place and also have this interest be deductible. Could someone help me envision what needs to happen with the current mortgage to make this system work?

  53. monopolyforreal on December 23, 2011 at 8:13 pm

    It looks like a while since a discussion has happened on here. Can anyone advise me on what to do in this case. I have a house in Victoria with no mortgage (it was my primary residence) and I’m renting it hoping prices will eventually pick back up. I have also bought a house in Vancouver. If I decide to sell the house in Victoria in a year or two do I need to pay capital gains tax because I have another primary residence in Vancouver or is it exempt because of the four year rule?

    • FrugalTrader on December 24, 2011 at 7:56 pm

      @monopolyforreal, you can only have one principal residence. Which is it? As well, I do not believe there is a “four year rule”.

  54. SYY on September 21, 2012 at 3:19 pm

    Hmm…Please advise anything I can do to fix this if I have already fallen into this BIG common mistake? Thanks a lot.

  55. Taxmaster's student on December 11, 2012 at 11:09 am

    @Ollie & Brookeprofessionnal : Regarding the transfer of a property and transferring the GEC as well or ACB, that doesn’t apply to any rental property, you guys are referring to either involuntarily disposition (ex: a fire) or voluntary disposition. In this case we would have a voluntary disposition, therefore in the tax act the rule is you have 12 month to buy a similar good to be used for similar purposes, if so you can transfer your capital gain to the new good, that way pushing back the tax on the capital gain that you would pay until when you sell the newly purchased good. Keep in mind this is not a tax evasion tactic put simply a way to differ your tax later on since the tax men will collect the same amount of money but only later on. This rule only apply to none rental property, it is explicitly mentioned in the law. Here’s a working example where this rule could apply, u own a business, you have a truck that you purchased for 20k and amortized for 15k therefore its value is 5k, but then you sell it for 30k. We agree that gain on capital will be 10k at 50% x your tax rate AND you will recapture some amortization as well for 15k since the tax men let you take 15k as expenses because it thought it would lose value, and that 15k is taxed at 100% not like capital gain, so right now you’re paying a lot of tax, but let’s say in 5 month you now purchase a new truck similar use for 50k, you will have the option to start amortizing this good at 35k instead of 50k (50k-15k the recapture amortization), and the ACB instead of being 50k it will be 40k (50k-10k the capital gain at 100%). This way you DIFFER your taxes and not avoid, because let’s say if you re sold this same truck at 50k its fair value the day you purchased it, your fair value would be 50k, ACB 40k so 10k in capital gain at 50%, and you would again recapture 15k in amortization.

    I hope that answers in detail your concert to regards of how this rule is applied to Canada (and also that no one else as answered that question).

    Regarding the rest of the article, to me what was explained in theories is sound, but do understand that CRA won’t like this sort of transaction, therefore you must make sure to cover all loose ends, I am saying always operating at fair market value, CRA as a form that you can fill out attesting that you believe that you are doing operations at fair value, but in the case where CRA proves you wrong you will take suggested estimate over your own, that way you don’t get a penalty on the difference of estimates. Involves separates bank accounts, and clear transaction, CRA will follow the money, so make sure we have different money going in all directions.

    As a reminder, a principal residence, your are allowed to declare one house your principal one every year (you can switch), a rental property cannot be considered a principal residence and when it is sold, it will be subject to tax on 50% of the capital gain if any.

  56. Taxmaster's student on December 11, 2012 at 11:17 am

    @monopolyforreal : You can be in big trouble … As soon as you started renting your other property for rental income you might have changed the purpose of the house from being a personnal property to a rental property, this could trigger a disposal even thought you havnt actually sold the house. That disposal would probably be tax free since you mentioned it is your primary residence, but do understand that you will loose your capital gain deduction on the future value of that house after that date of the disposition to yourself.

    regarding principal residence, it is up to you to decide each year which residence will get to be treated as so, understand that in the fomula every house gets one free year. In practice what we do is that before you sell a house we take the ACB of all your property and than there fair value today and than we see which one as a greater capital gain PER year (not overall), and that residence we will ellect it to be your primary residence. You may have more that one primary residence, but only 1 per year.

    I highly suggest speaking with a tax specialist or an accountant (cheaper) with experience in these transaction to avoid any re assement from CRA

  57. Matt on August 6, 2017 at 11:51 pm

    I own a residence in BC. I rent out the basement suite as a mortgage helper and live in the upstairs section as my primary residence. I claim the rental income yearly and use all tax benefits associated with that. I’ve been fortunate to have purchased the home in 2014 and now in 2017 August the home is valued at approximately $215,000 more than the purchased amount. I have substantial equity in this home.
    I am thinking of using an existing HELOC I have with this home to use towards purchasing another home.. this time the home is in Cochrane, Alberta. I’d like to move to this new home and declare it my primary residence and transition my BC home into a full rental property (basement suite and the upstairs section that I previously lived in).

    What are the tax implications with this situation? Would I be able to use the existing equity in my BC home and HELOC to use as a down payment on a new home and mortgage?

    What kinds of things should I be concerned about or what questions should I be asking?

  58. Bill on January 4, 2019 at 3:53 am

    It looks like BC property transfer taxes are except if transferring between parent and child and the either one has been living in the property for 6 months.

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