The replacement property rules in section 44 of the Income Tax Act, with a parallel rule in subsection 13(4) for depreciable property, allow a taxpayer to defer the capital gain and any recapture that would otherwise arise on certain dispositions where the proceeds are reinvested in a qualifying replacement property within set time limits.
The rules cover two situations. The first is an involuntary disposition, such as expropriation, theft, or destruction, where the replacement must generally be acquired within a defined period after the year of disposition. The second is a voluntary disposition of a former business property used to carry on a business, which is subject to a shorter replacement window. The replacement property must serve the same or a similar use, and the deferral works by reducing the cost of the new property by the deferred amount.