An Ontario investor wants to sell an appreciated rental property and buy a larger rental, deferring the capital gain the way US investors do with a section 1031 like-kind exchange. Under Canada's Income Tax Act, what is the position?
Correct Answer
C) Buying a replacement rental does not defer the gain on the property sold
Canada has no like-kind exchange; section 1031 is a US provision. The Income Tax Act's replacement-property rule in s. 44 applies to involuntary dispositions and to "former business property", and s. 248(1) expressly excludes rental property from that definition. Buying another rental therefore does not defer the gain on the one sold.
Why This Is the Correct Answer
The sale of the rental is a disposition, and the gain is computed in the year of sale. Section 44 would allow deferral only for involuntary dispositions or former business property, and the s. 248(1) definition of former business property excludes rental property and the land under it. Reinvesting in a larger rental does not change that.
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Previous Question
A Toronto resident owns two properties: their principal residence worth $800,000 (purchased for $400,000) and a cottage worth $500,000 (purchased for $300,000). If they sell both properties in the same year, what is their total taxable capital gain?
Next Question
An investor sells an appreciated rental property and agrees to receive most of the price over several years through a vendor take-back mortgage. Which Income Tax Act mechanism can spread the capital gain over those years?