Is there a 1031 exchange equivalent in Canada?

Question

Hi,

I have been trying to find the equivalent law in Canada of the 1031 exchange in the US.

What I have found, under the income tax act section 44 and 44.1, Canadian's can have their gains rolled over into other proper ties only if it was expropriation by the government, destroyed (partially or completely), and if the business was using the property to generate revenue excluding rental income.

I will post a link later if anybody is interested.

Has anyone found anything different? I read that Canadians can use the 1031 exchange on their US properties to bother other properties in the United States but it does not apply when buying/selling from US to Canada.

All the best,

Matt

Matt Belzile · Answer

The closest thing I've seen to being exempt from paying capital gains is the subsection 45(2) election. This let's you turn your principal residence into a rental while keeping it as your principal residence. it will let you do this for up to four years.  It's not exactly as sweet as the 1031 exchange but it's something! And can be useful in the right situation.

I'm doing it with one of my properties right now and with all the appreciation we've been having in BC, it makes for an interesting option to sell with out having to pay capital gains and being able to roll all the gains into something else.

Roy N. · Answer

@Matt Frey

The sections to which you refer are for replacement property ... most of the section is aimed at operational businesses which need to replace a facility (office, warehouse, factory) ... it is very rare that can you leverage them for investment properties - @Paul MacInnis may be able to shed some light as he's been exploring this section of the Income Tax act w/r to a property lost to fire.

There is no equivalent to the the U.S.A. Section 1031 in Canada.

Matt Frey · Answer

Hey Guys,

Thanks for your replies. That is unfortunate that Canada doesn't have a similar law. I was hoping to find one in my search.

Thanks for clearing that up!

Best,

Matt

David Chiu · Answer

For those of us who are Canadian tax-residents and own US rentals, it looks like it's not in our interest to use the 1031 exchange either because of CRA's claim on worldwide income and double taxation:

Section 1031 Like-Kind Exchanges for Canadian Residents - Altro LLP (altrolaw.com)

"As Canadian residents have the obligation to file and report their worldwide income to the CRA, they must report the sale of U.S. property on their Canadian tax returns. Generally, a taxpayer can claim any capital gains tax already paid to the IRS as a foreign tax credit on his Canadian return under the U.S.-Canada Tax Treaty. However, since there is no deferral equivalent to a Section 1031 Exchange under Canada’s Income Tax Act, a Canadian taxpayer must pay capital gains tax to the CRA even though the same tax is deferred on the U.S. side."

Account Closed · Answer

@Bob Booth

There is no 1031 in Canada. Never will be. Expect the opposite movement, ie: capital gains on principle residence very soon. The free money the idiots in Ottawa handed out to their friends will be funded by the middle class they keep preaching about protecting.

Kyle Czapski · Answer

The closest thing which is not the save but offers tax advantages is the Smith Manouevre.

Bob Booth · Answer

What is the CURRENT answer to this question?  Comments here are several years old.  Any changes since then?  I have clients who want to do a 1031-type exchange in Canada.

Oren K. · Answer

Ran across this article from a couple of years ago outlining the differences and likely consequences of Canadian vs US laws, assuming things have not changed, related to property 'exchanges' and specifically regarding 1031's in the US.

The last sentence 'suggests' that a Canadian can still do a US 1031 exchange with out double taxation but you would need to engage them to learn how (any accountants or lawyers care to pipe in?). I do know several Canadians that have done a 1031 exchange with out paying immediate taxes in Canada.

http://moodysgartner.com/can-canadian-taxpayers-de...

Roy N. · Answer

@Matt Belzile

In certain scenarios - i.e. where you were forced to relocate for employment - Section 45(2) can allow for a longer change of use deferral.

Matt Frey · Answer

@Meghan Chomut I am planning on holding onto them for long term and adding more as the years pass.  I was pretty intrigued by the US 1031 exchange, because of the ability to upgrade to higher value properties in the long run, but with this news, I have to consider properties to purchase a little different for now.

Is there a 1031 exchange equivalent in Canada?

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