Can I spread capital gains tax if the buyer pays me over several years?

When a buyer pays part of the price at closing and the rest later, a capital gains reserve lets you match part of the gain to the cash you have actually received. The CRA says most people can claim one when they dispose of a capital property. It is a timing rule, not an exemption: the whole gain is still taxed, over more than one year. A seller paid in instalments, for example under a vendor take-back, is the typical case.

How the reserve is calculated

You still work out the whole gain: the proceeds of disposition minus the adjusted cost base and the outlays and expenses of selling. You then deduct the reserve for the year and report what remains. Next year you add the earlier reserve back in and, if an amount is still payable, you may claim a new one. Form T2017 sets the maximum reserve and the number of years. CRA guide T4037 explains how to calculate and report a gain, including Schedule 3.

Who cannot claim one

The CRA says you generally cannot claim a reserve if you were not a resident of Canada at the end of the year or at any time in the following year, if you were exempt from tax at those times, or if you sold the property to a corporation you control in any way. The last condition turns on who controls the buyer, so check any holding-company structure first.

How long a reserve can run

For most reserves the CRA allows a limited number of years. A longer period is provided for certain transfers to your child, including transfers of qualified small business corporation shares and of family farm or fishing property, and for some qualifying business transfers.

Reserves and the capital gains deduction

A gain brought into income from a reserve qualifies for the capital gains deduction only if the original gain came from an eligible property, such as qualified small business corporation shares. The CRA also says the deduction you can claim on a reserve is based on the year the property was disposed of, not the year the reserve comes into income. Eligibility itself is covered in do my shares qualify for the capital gains exemption.