Last updated: September 13 2023

Capital Gains Deferrals:  Covid Time Not Counted

Danielle Doan

As the third quarter of 2023 begins, many taxpayers will be sitting down with their advisors to discuss tax planning and specifically, what can be done before year end to reduce or at least defer cash flow required to settle tax debts triggered by 2023 transactions. In addition, thanks to proposed legislative amendments released August 4, 2023, there may be opportunities to recoup prior year tax dollars regarding transactions that triggered tax; specifically for the deferral of capital gains that would otherwise be realized.

A quick review of the taxpayer’s annual corporate tax return schedule 6, or personal income tax schedule 3 will identify any capital gains reported. There may be an opportunity to defer the gain from property (other than shares), reported from the following incidents:

  • The capital property was unlawfully taken
  • The capital property was destroyed and the proceeds are from insurance
  • The capital property was taken or sold under a statutory authority (expropriation)
  • The capital property was a former business property (real property) of the taxpayer

Currently, pursuant to subsection 44(1), the taxpayer can defer the capital gain if they elect, and replace the property within a certain time period. The required time periods are; i) 24 months after the year of disposition for involuntary disposition and, 12 months after the year of disposition for voluntary disposition.

However, pursuant to proposed legislation released August 4, 2023, effective March 15, 2020 new subsection 44(1.01) would be added below subsection 44(1), to exclude the time between March 15, 2020 and March 12, 2022 from the calculation of the required replacement time period. This means Covid time does not count.

In the year of the disposition, the election will entitle the taxpayer to defer a portion of the income that would have been subject to taxation as a result of the disposition. The amount taxed in the year of disposition is the lesser of; i)the actual income or gain on the disposition and, ii)the amount of proceeds in excess of the cost of the replacement property. The amount that is not taxed is treated as a reduction of the tax cost of the replacement property, so that the taxation of this amount is deferred until such time as the replacement property itself is disposed of.

Let’s walk through an example. The taxpayer has lost a building due to a fire. The building had an original cost of $200,000 (no CCA taken). The insurance on this building provided a payment of $300,000. The taxpayer was able to build a new building in the same year as the fire for $375,000. However, it’s important to note, due to new proposed subsection 44(1.01), the 12 months in this replacement period calculation do not need to include any months between March 15, 2020 and March 12, 2022. The gain on the building would normally be $100,000, however as long as the taxpayer elects to use the replacement property rules, since the taxpayer paid more than the proceeds to replace the property, the taxpayer has no gain resulting from the disposition. The cost of the new building to the taxpayer is $375,000 - $100,000 or $275,000.

Make a Difference:  Continued careful planning surrounding the timing of replacing property that has been unlawfully taken, destroyed, expropriated, or sold must be performed if the taxpayer intends to use the replacement property rules to defer the capital gain. However, in addition, prior transactions should be reviewed in light of the proposed amendments to subsection 44(1.01) to exclude the months between March 15, 2020 and March 12, 2022 when calculating the required replacement time period, to ensure beneficial tax deferrals are utilized.