Module 6: Capital gains and losses - PD Net

Replacement property
Where a taxpayer realizes a capital gain on the involuntary disposition of a capital property or on the voluntary
disposition of a former business property, the taxpayer may elect, in the year the property is replaced, to defer
that gain. The gain may only be deferred to the extent that the taxpayer reinvests the proceeds of disposition
in a replacement property within a certain time frame.
The replacement property rules parallel the exchange of property rules for the disposition of depreciable
property [subsection 13(4)]. Under subsection 44(5), to qualify for the deferral, a replacement property must
meet these criteria:
be put to the same or similar use, by the taxpayer or a related person, as the former property;
and
be used by the taxpayer or a related person in the same business or a similar business.
Essentially, the taxpayer may elect to reduce the adjusted cost base of the replacement property to the extent
of the capital gain, or part thereof, reinvested in the replacement property. Any excess of the proceeds of
disposition over the replacement cost remains a capital gain.
On the disposition of land and a building, the taxpayer may elect, in the year of replacement [subsection 44(6],
to reallocate the excess proceeds of disposition between the components so that less capital gain or recapture
will be reported. This is further explained in text section 8,040, which is optional reading and
non-examinable.
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