Skip Ribbon Commands
Skip to main content

Replacement Property Tax Rules


As accountants, we often deal with situations where a business has sold a particular property, which can sometimes result in a significant amount of recaptured depreciation and capital gain. However, there may be situations where the income amounts and the related income taxes could be deferred to some future time, provided that a replacement property is purchased and the necessary election is filed with Canada Revenue Agency (CRA). Here is a very brief outline of where these rules could be used.

First, the property in question must have been used by a business, taxpayer or related person in Canada. Based on this rule, a rental property that is generating income from third parties would not qualify.

Next, there is a time limit on when the replacement property has to be acquired. That time limit is generally one year following the year in which the former business property was sold. For example, if the former business property was owned by a company and was sold in its year ended January 31, 2015, the replacement property must be purchased by no later than January 31, 2016. There are some circumstances where this can be extended, such as when the former property was expropriated or where it was destroyed by fire or some other calamity, so if you find yourself in a situation like this, speak to a tax advisor.

Some other things to note: CRA has an administrative position that you cannot sell a property and replace it with a significantly larger one as part of an expansion of a business. However, they have also said that if you sold an older property and moved somewhere else where the replacement property was larger, but at a location where the property costs were lower, that replacement could perhaps be acceptable under the replacement property rules.

The bottom line is rules exist for the replacement of one sold property with another while deferring the sales income tax costs. But the rules are not as simple as they may sound. The prudent thing to do is consult with your tax advisor, preferably prior to the sale, but certainly after the sale of the former property, to determine if a replacement property would qualify under these rules.