Canada: Tax Treatment of Expropriated Property

Last Updated: January 6 2016

Tax Treatment Of Expropriated Property and Replacement Property

Subsections 13(4) and 44(1) of the Income Tax Act permit a taxpayer to elect to defer the recognition of income or capital gains where a "former property" is involuntarily disposed of, or a former property that is a "former business property" is voluntarily disposed of, and a "replacement property" is acquired.

These provisions allow taxpayers that have disposed of property to defer the resulting tax consequences and relocate businesses without incurring immediate tax consequences. Where the former property (other than eligible capital property) has been involuntarily disposed of, for example, stolen, destroyed or taken under statutory authority, the replacement property must be acquired within two years of the end of the taxation year in which the disposition of the property is deemed to have occurred and proceeds to have become receivable.

For income tax purposes the expropriation of property, or its destruction or theft, is deemed to be a disposition giving rise to a capital gain or recapture of capital cost allowance (depreciation). To the extent that a taxpayer receives the insurance proceeds on destroyed or stolen property, or expropriation proceeds from the government which is expropriating, and keeps those funds without replacing the property, then it is appropriate for tax to be paid on any capital gain or recapture. However, to the extent that the taxpayer goes out and acquires a replacement property, it would be unjust to charge tax.

Where the property is former business property and the disposition is voluntary, or eligible capital property, the replacement property must be acquired within one year of the end of the taxation year in which the disposition occurred (for depreciable property or eligible capital property) or when an amount becomes receivable as proceeds of disposition for capital property. The replacement property must be acquired to replace the former property, have the same or similar use as the former property and, if the former property was used for the purpose of gaining or producing income from a business, the replacement property must be acquired for the purpose of producing income from the same or a similar business.

A "former business property" as defined in subsection 248(1) is capital property that is real property or an interest therein that is used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business but generally does not include rental property.

Where such a former property was expropriated the replacement property can be acquired at any time after the taxpayer receives notice of an intention to expropriate and before the end of the 2 year time period stated above.

There is no requirement in the Tax Act that the replacement property be acquired after the former property is disposed of, but the property must nevertheless qualify as a replacement property.

A taxpayer must elect to have the provisions of subsections 44(1), 13(4) and 14(6) apply. The election should be made as follows:

  • If the disposition and replacement take place in the same year, the taxpayer's calculation (in the income tax return for that year) of the recaptured capital cost allowance, the amount under subsection 14(5) by reason of subsection 14(6) (that is, for purposes of determining the balance in the pool of eligible capital property - see the current version of IT-123), or the capital gain by virtue of subsection 44(1) will be considered to constitute an election.
  • If the property is not replaced until a subsequent year, the election should take the form of a letter attached to the income tax return for the year the replacement property is acquired. The letter should include a description of the replacement property and the former property, a request for an adjustment to the recapture of capital cost allowance, the taxable capital gain reported, or the amount included in income by virtue of subsection 14(1) in a prior year, and a calculation of the revised recapture, taxable capital gain or cumulative eligible capital.
  • If the replacement property is acquired prior to the year of disposition of the property, the election to apply subsections 13(4), 44(1) and 14(6) should take the form of a letter attached to the income tax return for the year in which the replacement property is acquired and the letter should include descriptions of the replacement property and the property that is to be replaced. If the taxpayer late-files such an election, it will be accepted if it is filed in the income tax return for the year in which the former property is disposed of, provided it is evident that the new property qualifies as a replacement property.

The Income Tax Act therefore effectively contains a rollover provision which applies when compensation is receivable in respect of capital property that has been stolen, destroyed or expropriated. Under these circumstances, a taxpayer is permitted to defer all or a part of any capital gain arising on such disposition by purchasing a replacement property. Any excess of proceeds received, for the expropriated or destroyed property, over replacement cost will be deemed to be the gain realized, and the unrecognized portion of the gain will reduce the cost, or capital cost, of the replacement property which is acquired. In this way, liability for tax on any gain arising from the disposition or deemed disposition of the former property is deferred until the disposition of the replacement property.

For these rules to apply, the taxpayer must have received proceeds of disposition of capital property in any of the following circumstances:

  • As compensation for depreciable or other capital property that has been stolen,
  • As compensation for depreciable or other capital property that has been destroyed, and any amount payable under a policy of insurance in respect of the loss or destruction of such property,
  • As compensation for depreciable or other capital property taken under statutory authority (expropriated) or the sale price of such property sold to a person by whom notice of an intention to take it under statutory authority was given.

In order to qualify for the deferral of tax rollover a replacement property must be acquired. As stated above, the new property must be acquired before the end of second taxation year following the year in which the proceeds of disposition of the former property became receivable in the case of an expropriation.

A particular capital property is a replacement property if:

  • It was acquired by the taxpayer for the same or a similar use as the use to which the former property was put by the taxpayer or a person related to the taxpayer; or
  • Where the former property was used by the taxpayer or a person related to the taxpayer for the purpose of gaining or producing income from a business, the particular property was acquired for the purpose of gaining or producing income from the same or a similar business or for use by a related person for such purpose.

The fact that the specific funds received for the former property are used to acquire another property in no way bears on the determination of whether or not the acquired property constitutes a replacement. It also follows that where a taxpayer temporarily invests such funds pending a decision on the acquisition of a replacement property, the temporary investment would normally not itself constitute the replacement.

If a taxpayer exchanges one property for another, the new property will qualify as a replacement property provided it is in fact a replacement property and the other requirements are met.

As noted above, a taxpayer effectively has 2 years to acquire a replacement property for expropriation and one year for former business property. . If he does not acquire it in the year of disposition (expropriation or destruction) he will have to include the disposition on his tax return for the year. However, when a replacement property is acquired, he will be able to amend that return claiming the rollover.

If a replacement property is acquired for an amount which is greater than or equal to the insurance proceeds or proceeds of expropriation, then the effect of the rollover provision is to transfer the undepreciated capital cost (undepreciated asset cost) and the adjusted cost base for tax purposes into the new asset and to fully defer any capital gain or recapture as a result of the expropriated or destroyed asset. However, if the new asset costs less than the proceed from the old asset, then a partial capital gain or recapture will be recognized and the rest will be deferred.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centres
Competition and Antitrust
Mergers and Acquisitions
Labour and Employment
More Advice Centers
Useful Resources
Forms available to download for income tax filing in Canada.
Hear David J. Rotfleisch discuss timely and highly topical tax matters during appearances and interviews with specialist publications.
Useful explanatory videos of income tax matters.
The following questions and answers are based on the proposed measures that were announced on December 7, 2015.
The official Government website of the CRA.
This guide is for any person who deals with the Canada Revenue Agency (CRA). The guide gives you information on the 16 rights set out in the Taxpayer Bill of Rights and explains what you can do if you believe that the CRA has not respected your rights.
The Office of the Taxpayers' Ombudsman (OTO) works to enhance the Canada Revenue Agency's (CRA) accountability in its service to, and treatment of, taxpayers and benefit recipients through independent and impartial reviews of service-related complaints and systemic issues.
Ontario personal income tax is an annual tax collected from individuals who are Ontario residents on the last day of the tax year or have income earned in Ontario for the tax year.
The following documents provide instructions for filing your 2015 income tax return.
If you earned income in B.C. or operated a Corporation with a permanent establishment in B.C. last year you need to file an income tax return. Find out when you need to file your income tax return, and if any tax credits or rebates apply to you.
Generally, a corporation must file an Alberta corporate income tax return (AT1) for each taxation year during which it has a permanent establishment in Alberta.
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.