Replacement rules… what are they and when do they apply? Clients come to us misinformed on this topic all the time so we’re clearing it up for you in this week’s Weekly Tax Planning Tip Video. Enjoy…


Hey there, today we’re going to talk about the replacement rules, what they are and when they apply.

So this is a topic that we often see our clients being misinformed on, so we thought it’d be a good topic to do a video on.

So the replacement rules are actually quite simple. It’s a tax deferral mechanism that the Department of Finance allows small business owners to defer tax on the sale of capital assets when they’ve purchased a new asset to replace the existing asset.

So let’s say I have a small business and in that small business, I own my building where I operate out of. If I sell that building under normal terms, then I’m taxed on any gains that I have in there. Well, what finance has said is that if I go and buy a new building, let’s say I grow my business and I need a new building, bigger space, I’m allowed to defer the gain that I’ve made on my first sale and that actually reduces the cost base of my new building when I set it up in my books, allowing me to really defer the gain to when I ultimately dispose of that asset or that new building.

So there’s some rules, some specific areas where we’re clients get confused. So rental properties, this is a place where you are not allowed, or the replacement rules are strictly prohibited. I’m also any type of inventory if you’re in the nature of selling land or developing property, this doesn’t, uh, this doesn’t relate to you. You’re not allowed to defer the tax on that.

So it’s really just if you have a capital asset that you’re using in your business, um, you’re able to defer the tax to the ultimate disposition of the new property or, or new capital asset that you got it.

So I hope that helps and we’ll see you next time.