How does a seller claim the capital gains reserve on a vendor take-back?

When part of the price of a business is paid later under a vendor take-back, the seller may be able to claim a reserve. The CRA says that, usually, a reserve allows you to report a portion of the capital gain in the year you receive the proceeds, based on the portion of the proceeds not yet received. This page covers the paperwork. For why the reserve exists, see how a vendor take-back is taxed.

The forms

The CRA says that to deduct a reserve in any year, you have to complete Form T2017, Summary of Reserves on Dispositions of Capital Property. It describes the form as the one used by individuals claiming a reserve on dispositions of capital property in the year, or reporting a reserve claimed on the previous return. The CRA says the last page of the form explains how to work out the maximum reserve for a given year and the number of years it can be claimed. The amount from line 31 of the form goes on line 19200 of Schedule 3, Capital gains or losses. The reserve itself is set out in subparagraph 40(1)(a)(iii) of the Income Tax Act, subject to the exceptions in paragraph 40(2)(a).

The next year and the claim period

If you claimed a reserve in the previous year, the CRA says to include that reserve in the calculation of your capital gains for the current year. If an amount is still payable to you, you may be able to calculate and claim a new reserve. The CRA says the amount claimed in a later year cannot be more than the amount claimed for that property in the year before. It states that, generally, there is a maximum period over which most reserves can be claimed, and it describes a longer period for certain transfers, such as family farm or fishing property to a child. Ask your accountant how many years apply to your sale.

Who cannot claim

The CRA says most people can claim a reserve when they dispose of a capital property. It adds that, generally, you cannot claim one in a tax year if:

• you were not a resident of Canada at the end of the tax year, or at any time in the following year;
• you were exempt from paying tax at the end of the tax year, or at any time in the following year; or
• you sold the capital property to a corporation that you control in any way.

The Act’s own list in paragraph 40(2)(a) is wider than the CRA’s summary: it also covers a sale to a corporation controlled by a person or group of persons who control the seller, and a sale to a partnership in which the seller is a majority-interest partner immediately after the sale. Because these turn on who controls the buyer, confirm the buyer’s ownership before relying on a reserve. For the wider tax picture of a sale, see how capital gains are taxed when you sell your business.