Capital gains reserves

When you sell capital property, such as real estate or shares in a corporation, and the proceeds from the sale will not all be receivable in the year of sale, you can defer a portion of the capital gain by claiming a reserve.

The rules provide that at least one-fifth of your taxable capital gain must be reported in the year of sale and each of the four following years. An exception is provided if you transfer certain farm property, fishing property or shares in an SBC to your children. In these cases, you can claim a reserve over a maximum 10-year period. Reserves deducted from income in one year must be added to income in the subsequent year.

Tax tip: Claiming a reserve is optional—any amount up to the maximum allowed can be claimed. To make a claim, you must file Form T2017 with your income tax return.

Capital gains reserves included in income will be eligible for the capital gains deduction if the property is a share of a QSBC, a qualified farm property or a qualified fishing property (see topics 136, 137 and 138).

Tax tip: In structuring the sale of property, make sure you have sufficient funds to pay the taxes required. If proceeds are deferred over a long period, the tax may be due before the proceeds are received. Suppose you sell real estate for a significant capital gain in 2016 and the proceeds are due over the next 10 years. The taxes arising on the capital gain must be paid in full by 2020, even though all proceeds will not be received until 2025.