Also, if I co-own this house with a colleague (not spouse/partner), is it automatically assumed to be “joint tenancy” or is it assumed to be “tenants in common” if it is not specified (i.e. the title just shows the two names)?
Capital gains when moving into a co-owned property
When you have a change in use for real estate you own, Debra, you are considered to have sold it and then reacquired it immediately. The transaction is considered to have taken place at the fair market value for the property, so you cannot assume an artificially low value. This generally results in a capital gain if the property has appreciated. If you have claimed depreciation (as capital cost allowance), the previous claims are brought into income in that year (known as recapture of capital cost allowance).
In your case, when changing a rental property to a principal residence, you may be able to elect to defer the capital gain. You cannot elect this if you or your spouse or common-law partner claimed capital cost allowance deductions in the past. Otherwise, you can elect to defer the capital gain until you sell the property.
How to defer capital gains
In order to claim the tax deferral, you need to prepare a letter and attach it to your tax return. The letter does not necessarily need to be submitted in the year that you move into the property. It can be as late as the due date for your tax return in the year you sell the property—or earlier, if Canada Revenue Agency (CRA) asks you to make the election. There is no specific format the letter must follow, but it should identify the property and state that you are electing to have subsection 45(3) of the Income Tax Act apply to it.
You may be eligible to designate the property as your principal residence for up to four years prior to moving into it, assuming you did not claim—or do not intend to claim—another property as your principal residence for those same years. This can reduce some of the capital gains tax that accumulated prior to moving into it.
Making this election, Debra, may allow you to defer the capital gains tax on the property as late as the year of your death, as this is considered to be a deemed sale.
If you have a mortgage used to purchase the rental property, the interest will likely no longer be tax deductible. This is because the debt no longer applies to a rental property being used to generate taxable income. The debt also becomes a personal use debt, like the property.