Replacement Property Rules

Replacement Property Rules

When businesses replace their old business properties with the new one. They have to meet certain criteria to make it qualify for replacement property rules:

  • The property was acquired to replace former property
  • The property acquired will be used in same or similar business by taxpayer or related/affiliated person *Note that you can use the property for insignificant portion for different use
  • If the former property was a taxable Canadian property than the new property should also be
  • Should be replaced within specific time frame as discussed below

What are the Replacement Property Rules?

Depends on whether it is  a voluntary disposal or involuntary disposal:

  1. Voluntary Disposition:
    • Property must be replaced within one year from the end of taxation year of sale.
    • Must be a former business property i.e. land and building (not equipment)- cannot be real estate rental.
    • The new property acquired must be used to produce income from similar business
  2. Involuntary Disposition (e.g. fire, natural disasters etc.):
    • Replaced within 2 years from the end of the year the proceeds (insurance) became receivable
    • Land, building and equipment used in earning business or property income qualify

Replacement property – Usefulness

Allows taxpayer to elect to defer the tax on the recapture/capital gain to the extent that the taxpayer reinvests the proceeds of disposition in a replacement property

Capital gain lesser of

  • Actual Capital Gain
  • Proceeds not reinvested
    • POD = 100, ACB = 50, replacement done in 1 year for 80
      • Actual CG = 50
      • POD not reinvested = 100-80 = 20 ***

Recapture – lesser of

  • Actual recapture
  • Recapture not reinvested
    • POD = 100, ACB=50, UCC = 10, replacement done in 1 yr. for 80
      • CCA Recap = 40
      • CCA Recap not reinvested = 40-80 = 0

New ACB of the property = Cost – capital gain deferred

New UCC of the property = Cost – capital gain deferred – recapture

Planning opportunities

  • To defer the capital gain: reinvest an amount equal to or greater than the proceeds from selling old property
  • To defer recapture: reinvest amount equal to recapture.

Other Matters

  • Replacement property need not to be in the same class as the old property
  • Election required to be made in the year of acquisition of the replacement property to amend the return for the year in which the voluntary/involuntary disposition took place

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