When your girlfriend changed the use of her property from her primary residence to a rental property, there was a ‘deemed sale’ at that time. As a result, the appreciation of the property from the date of purchase to the date of the ‘deemed sale’ becomes a taxable capital gain. However, since she lived in the property from the date she purchased it to the date she moved out, she can utilize the principal residence exemption to offset the entire amount of the taxable capital gain.
If she sells the property now, the taxable capital gain will be calculated as follows: (a) Selling Price (net of selling costs) minus (b) Fair Market Value on Date Property Became a Rental = Capital Gain. One half of this capital gain is taxable to her in the year of sale.
Had she filed an election under subsection 45(2) of the Canadian Income Tax Act in the year that the property became a rental property, she could have treated the rental property as her primary residence for up to 4 additional tax years, for the purposes of the principal residence exemption. If she had done this, and sold the property now, then she would have no taxable capital gain on the sale of the property. However, it’s too late to make this election now.