Can I structure a family sale as payments over several years?

A sale to a family member can be paid in instalments. BDC lists vendor financing among the ways a seller can remain involved with a business after selling it. Two separate questions follow: how the seller reports the gain for tax, and how the payments are written down and secured.

How the capital gains reserve works

The CRA says that when you sell a capital property you usually receive full payment at the time, but sometimes you are paid over a number of years. A reserve then usually lets you report a portion of the gain in the year you receive the proceeds, based on the portion of the proceeds not yet received. You still calculate the whole gain, deduct the reserve for the year, and complete Form T2017.

When the period stretches to ten years

The CRA says that, generally, the maximum period over which most reserves can be claimed is four years, so the gain is included in income over five. It provides a nine-year reserve, with the gain included over 10 years, in listed circumstances. These include transfers to your child of family farm or fishing property or of qualified small business corporation shares, and intergenerational business transfers of shares of a family farm or fishing corporation or of qualified small business corporation shares to a corporation controlled by one or more of your children, under certain conditions. The CRA counts a grandchild and a child’s spouse as children.

Who cannot claim a reserve

Generally, the CRA says you cannot claim a reserve in a tax year if you were not a resident of Canada, or were exempt from paying tax, at the end of that year or at any time in the following year, or if you sold the capital property to a corporation that you control in any way. Check this before relying on a reserve in a sale to a family company.

Writing the payments down

The reserve affects only how the gain is reported for tax; it does not set the payment terms between buyer and seller. The amount, schedule, interest and any security for the unpaid balance are matters for the agreement between them. In Ontario, the Personal Property Security Act says a security interest is perfected when it has attached and the steps the Act requires for perfection have been completed.