Replacement property rules

Question 1

Replacement property rules (Taxation)

Answer 1

• In an arm’s length transaction, when one property is exchanged for another property, it is deemed to be disposed of for proceeds equal to the fair market value, and any excess of proceeds over adjusted cost base is a capital gain
• If replacement property criteria are met, then an election is available to fully defer any recapture/capital gain arising on the deemed disposition, by reducing the UCC/cost base of the acquired property by the amount of the recapture/capital gain, respectively.
• To be eligible to defer the gain, the replacement property rules must apply:
  o It is reasonable to conclude that the property was acquired by the taxpayer to replace the former property (and put to the same or similar use)
  o 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 capital property was acquired for the purpose of gaining or producing income from that or a similar business or for use by a person related to the taxpayer for such a purpose
  o Where the former property was a taxable Canadian property of the taxpayer, the particular capital property is a taxable Canadian property of the taxpayer

Reference: ITA 13(4), 44