Renting a Parent’s Home After Long-Term Care: Capital Gains Tax in Canada

I get this question all the time—from clients, friends, and even in online forums like Reddit:

“My mother moved into a nursing home. Her house was her principal residence. We’re thinking of renting it out. Will there be capital gains tax?”

The short answer is yes, potentially.
The better news? There may be a way to delay or reduce that tax if the proper steps are taken early.

This situation is more common than most families expect, and getting it wrong can result in unnecessary capital gains tax, penalties, and stress during an already emotional time.

Let’s break it down.

What Happens When a Parent Moves Into Long-Term Care?

When a parent moves into a nursing home or long-term care facility, families often choose to rent out the home temporarily rather than selling it right away. This can help cover care costs and preserve flexibility.

However, from a tax perspective, renting out the property can trigger a “change in use” under the Income Tax Act.

Once a home stops being used as a personal residence and starts generating rental income, the CRA may consider it no longer a principal residence. That’s where capital gains tax can come into play.

Does Renting the Home Trigger Capital Gains Tax?

Normally, yes.

If the property is considered to have changed its use from personal to rental, the CRA treats it as if it were sold at fair market value on the date it was first rented. Any increase in value after that date could be subject to capital gains tax when the home is eventually sold.

This means:

• The principal residence exemption may stop

• Capital gains can start accumulating immediately

• Additional reporting requirements apply

But there is an important exception many families don’t know about.

The 45(2) Election: A Powerful Tax Planning Tool

Under subsection 45(2) of the Income Tax Act, homeowners may be able to continue treating the property as a principal residence for up to four additional years, even while it’s being rented out.

This election can:

• Defer the deemed disposition

• Extend the principal residence exemption

• Reduce or eliminate capital gains tax when the home is sold

In many cases, this election makes a significant difference.

Conditions to Qualify for the 45(2) Election

To use this election, all of the following conditions must be met:

• The home was the principal residence before it was rented

• No capital cost allowance (CCA) is claimed during the rental period

• A formal election is filed with the CRA in the year the property is first rented

Missing any of these steps can void the election.

Why This Election Matters So Much

If the 45(2) election is not filed on time, the CRA will treat the home as having changed its use immediately. This can result in:

• Capital gains starting earlier than expected

• Mandatory filing of Form T2091

• Potential penalties for late or missed filings

• Loss of part (or all) of the principal residence exemption

Late elections are not always accepted, and relying on CRA discretion is risky.

A Common and Costly Mistake Families Make

Many families assume that simply renting the home “for a short time” won’t affect taxes. Unfortunately, that assumption can be expensive.

The tax rules around principal residences, rental income, and elections are technical, and CRA does not automatically apply exemptions—you must elect and report properly.

This is not a DIY situation.

Final Thoughts

Renting out a parent’s home after they move into long-term care is extremely common across Ontario and Canada—but the tax consequences are often misunderstood.

With the proper 45(2) election, you may be able to:

• Protect more of the home’s value

• Defer capital gains tax

• Avoid unnecessary CRA penalties

But timing and proper filing are critical.

Need Help With a 45(2) Election or Capital Gains Planning?

This is a scenario I regularly help families with across Ontario. If you’re considering renting a parent’s home—or already have—professional advice early can save you thousands in tax.

Book a free Discovery Call to review your situation and ensure everything is handled correctly before it’s too late.