Replacement property
In some cases, you can postpone or defer including a capital gain or recapture of capital cost allowance (CCA) in calculating income. You might sell a business property and replace it with a similar one, or your property might be stolen, destroyed or expropriated, and you replace it with a similar one.
To defer reporting the gain or recapture of CCA, you (or a person related to you) must acquire the replacement property within the specified time limits and use the new property for the same or similar purpose.
You can also defer a capital gain or recapture of CCA when you transfer property to a corporation, a partnership or your child.
Example
During the current tax year, D'Arcy bought a building to use for his business. The total cost was $95,000 (the sum of the $90,000 total purchase price and the $5,000 total expenses connected with the purchase). The details are as follows:
| Building value | $75,000 |
| Land value | $15,000 |
| Total purchase price | $90,000 |
| Expenses connected with the purchase: | |
| Legal fees | $3,000 |
| Land transfer taxes | $2,000 |
| Total fees | $5,000 |
D'Arcy's business has a December 31 year-end. In 2022, D'Arcy's income was $6,000 and his expenses were $4,900. Therefore, his net income before deducting CCA was $1,100 ($6,000 - $4,900). D'Arcy wants to deduct as much CCA as he can.
Before D'Arcy can fill in his CCA table in Area A of Form T2125, he has to calculate the capital cost of the building. Since land is not depreciable property, he has to calculate the part of the expenses connected with the purchase that relates only to the building. To do this, he has to use the following formula:
($75,000 ÷ $90,000) × $5,000 = $4,166.67
This $4,166.67 represents the part of the $5,000 in legal fees and land transfer taxes that relates to the purchase of the building. The remaining $833.33 relates to the purchase of the land. Therefore, the capital cost of the building is:
| Building value | $75,000 |
| Related expenses | $ 4,166.67 |
| Capital cost of the building | $79,166.67 |
D'Arcy enters $79,166.67 in column 3 of Area C and $15,833.33 ($15,000 + $833.33) on line 9923 of Area F as the capital cost of the land.
Note
D'Arcy did not own property before the current year. Therefore, he has no UCC to enter in column 2 of Area A.
D'Arcy acquired his property during the current year. Therefore, he is subject to the half-year rule.
Forms and publications
- Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income
- Guide T4037, Capital Gains
- Form T2125, Statement of Business or Professional Activities
- Schedule 3, Capital Gains (or Losses)
- Income Tax Folio S3-F3-C1, Replacement Property
- Information Circular IC76-19, Transfer of Property to a Corporation Under Section 85
- Interpretation Bulletin IT-143, Meaning of Eligible Capital Expenditure
- Interpretation Bulletin IT-291, Transfer of Property to a Corporation Under Subsection 85(1)
- Interpretation Bulletin IT-378, Winding-up of a Partnership
- Interpretation Bulletin IT-413, Election by Members of a Partnership Under Subsection 97(2)
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