When a taxpayer converts his/her principal residence into an income-producing property, a deemed disposition has occurred. Such a deemed disposition has occurred at the Fair Market Value on the date of conversion. The taxpayer can then claim principal residence exemption on this deemed disposition. Moving forward, the adjusted cost basis of this property is the FMV at which deemed disposition had happened.
Subsection 45(2) allows a taxpayer to elect as if a change of use has not happened. The taxpayer is required to send a letter to CRA making this election. A taxpayer can continue to elect the property as a principal residence for up to four years under subsection 45(2) election. In some cases, you can still file a late-election if you forgot to use the taxpayer relief provisions. Subsection 45(2) election does not exempt a taxpayer from reporting income earned from the property, the taxpayer must report all the income and expenses from that property.