The change-of-use rules in section 45 of the Income Tax Act treat a taxpayer as having disposed of property at fair market value, and immediately reacquired it, when the use of the property changes between personal use and income-earning use. The deemed disposition can trigger a capital gain even though no sale has occurred, and it resets the property's cost for future purposes.
A common example is converting a principal residence into a rental property, or a rental property into a personal residence. Elections under subsections 45(2) and 45(3) can, in defined circumstances, defer the deemed disposition and preserve access to the principal residence exemption for a limited number of years. The interaction between a change in use, the deemed disposition, and the principal residence exemption is a frequent planning consideration for real property.