Transferring a Rental Property to a Corporation

What You Need to Know About the Principal Residence Exemption (PRE)

Thinking of transferring your rental property from personal ownership to your corporation? This move can offer strategic advantages—but it also triggers a deemed disposition, meaning the Canada Revenue Agency (CRA) treats it as if you’ve sold the property at fair market value. That’s where the Principal Residence Exemption (PRE) comes in.

Let’s walk through how you might reduce or even eliminate tax on some of the capital gain with the PRE.

When You Can Claim the PRE

You may be able to reduce the taxable gain if:

  • You personally lived in the property for one or more years during your ownership.

  • You designate those years as your principal residence on CRA Form T2091 in the year of the transfer.

  • You are not claiming the PRE for another property for those same years.

When You Cannot Claim the PRE

You won’t be eligible for the PRE if:

  • The property was only ever a rental and never your principal residence.

  • You never personally lived in the property.

  • You’re looking to claim it for any future years when the property is owned by a corporation (corporations do not qualify for the PRE).

Real-Life Example: Standard PRE Claim

Let’s say you:

  • Bought a condo in 2015

  • Lived there from 2015 to 2018

  • Rented it out from 2019 onward

  • Plan to transfer it to your corporation in 2025

✅ PRE Eligibility:

  • 2015–2018: You lived there — full PRE applies

  • 2019–2025: Property was a rental — not eligible for PRE
    You’d only pay capital gains tax on the 2019–2025 portion of the gain.

The 4-Year Rental Exemption (Subsection 45(2) Election)

Here’s a hidden gem! If you previously lived in the property and then started renting it out, you may qualify for a 4-year rental exemption — even while you’re not living there!

With a subsection 45(2) election, you can:

  • Defer the deemed disposition when switching to rental use, and

  • Continue to claim the PRE for up to 4 more years, if:

    • You don’t claim depreciation (CCA) on the property.

    • You intend to move back in (CRA accepts this if your intentions were reasonable).

    • You file the election in writing with your tax return for the year rental began.

Real-Life Example: Using the 4-Year Exemption

Let’s say you:

  • Bought and lived in a condo from 2015 to 2018

  • Rented it from 2019 onward

  • Filed a 45(2) election with your 2019 return

  • Transfer it to your corporation in 2025

✅ PRE Eligibility:

  • 2015–2018: You lived in the home — full PRE

  • 2019–2022: Covered by the 4-year rule — PRE applies

  • 2023–2025: Rental years outside the 4-year limit — PRE not available

You would only pay capital gains tax on the 2023–2025 portion of the gain.

Important Limitations

The 4-year exemption ends after four rental years unless you move back in.

  • Once transferred to a corporation, the property is never eligible for PRE again.

  • Unless using a Section 85 rollover (which defers the capital gain), the deemed disposition must be reported at fair market value at time of transfer.

  • Note: A Section 85 rollover defers tax, but you cannot use the PRE if you choose this route.

Final Thoughts

Transferring a property to your corporation can be a smart move, but the tax impact deserves careful planning. If you’ve lived in the property before renting it out, or you’re wondering how to maximize your exemptions, we’re here to help every step of the way.

Have questions or want to explore your specific situation? Let’s chat!