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
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
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The CRA provides new housing rebates for individuals who have purchased or built a new house or have substantially renovated a house or made a major addition to a house who plan on living in it personally or letting a relative live there.
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