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Replacement Property Rules for Taxation

May 22, 2018

Tax Question:

What are the replacement property rules for taxation?


In the normal course of business, a corporation may sell a property and purchase a replacement property. There are replacement property rules in place that can help a corporation defer income, capital gains or recapture of capital cost allowance.


If a replacement property is purchased that costs at least the same amount as proceeds received on the sale of an old property, there should be no recapture or capital gains. However, an election is required to be filed with CRA in the corporate tax return when the replacement property is acquired.

There are other rules that exist for a voluntary disposition such as: if the former property was being used for earning business income and not rental income, then the replacement property must be acquired within 12 months of the end of the taxation year of disposition. An involuntary disposition can occur if a property earning business or property income-earning is destroyed (such as in a fire) or expropriated. The replacement property must be acquired within 24 months of the end of the taxation year when the property was disposed of.

Under subsection 44(2) of the Income Tax Act, the proceeds for involuntary dispositions are deemed to be received when:

a) the day the taxpayer has agreed to an amount for full compensation

b) a legal claim or proceeding in court has determined an amount

c) if there is no claim in court, then 2 years after the day of involuntary disposition

The replacement property must be used for the same or similar use as the former property. CRA will apply a reasonable test to ensure that it fits the criteria. Replacement property rules do not apply to rental properties unless rented to a related property for the purposes of earning active income.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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