How do I report the sale of a business on my tax return?

If you sold a business as an individual, the sale shows up on your personal tax return, and the CRA has a set path for reporting it. What you report can depend on what you sold, shares or business assets, and some parts of the sale, such as a recapture of capital cost allowance, are a separate item from the capital gain. This guide explains where the numbers go, using the CRA’s own guidance. It does not say how much tax you will owe or how the sale should be structured. That depends on facts about your business, and an accountant should work it out.

Calculate the gain before you fill in a form

The CRA says that to calculate a capital gain or loss, you subtract the total of your property’s adjusted cost base, and any outlays and expenses incurred to sell it, from the proceeds of disposition. A capital gain arises when the proceeds are more than that total, and a capital loss when they are less. Gather the original cost records and your selling expenses, because both reduce the gain. If the sale covers more than one property, ask your accountant how to work this out for each one.

Report it on Schedule 3 and line 12700

You have to complete Schedule 3, Capital Gains or Losses, to determine your taxable capital gains or your net capital loss. The CRA says line 19900 of Schedule 3 shows which you have. If the amount is positive, you enter your taxable capital gains on line 12700 of your return. If it is negative, it is a net capital loss and you do not report it on line 12700. The CRA also says you report the sale in the calendar year it takes place, even if your business has a fiscal year-end other than December 31, and that you must file a return to report it even if no tax is payable.

If the sale produces a loss

The CRA says that if you have a capital loss in the year, you can use it to reduce any capital gains you had in that year, to a balance of zero. If your capital losses are more than your capital gains, you may have a net capital loss for the year, and the CRA says you can generally apply net capital losses to taxable capital gains of the three preceding years and to any future years. Keep the records that support the loss, since a sale for less than the adjusted cost base plus selling costs is where it arises.

If you are paid over several years, ask about a reserve

If you do not receive the full price at closing, the CRA says you may be able to claim a reserve. Most people can claim one, though generally you cannot in certain situations the CRA lists, such as selling the property to a corporation you control. A reserve is deducted on Form T2017, Summary of Reserves on Dispositions of Capital Property. The CRA says that, generally, the maximum period over which most reserves can be claimed is four years, so the total capital gain is included in income over five years, and a nine-year reserve period applies in some cases it lists, such as transfers to your child of qualified small business corporation shares. Check with your accountant whether your sale qualifies.

The capital gains deduction applies only to certain property

The CRA says that if you realized taxable capital gains from the disposition of qualified farm or fishing property or qualified small business corporation shares, you may be eligible to claim a capital gains deduction. You claim it on line 25400 of your return, and Form T657 is used to calculate it. The CRA says you generally have to meet all of its listed conditions, which include being a resident of Canada throughout the year and having capital gains that are eligible for the deduction. Whether your shares or property qualify is a technical question, so confirm it with an accountant before you sell, not after.

Depreciable assets and the GST/HST election are separate items

If you sold equipment or other depreciable property, the CRA’s guidance on selling a business says that, depending on your situation, you may have a recapture or a terminal loss of capital cost allowance (CCA) on the sale of your assets. Its capital cost allowance guidance also refers to cases where you can postpone or defer adding a capital gain or recapture of CCA to your income. The GST/HST election between seller and buyer is made on Form GST44, which the CRA says the purchaser files, not on your income tax return, and the CRA says that when you sell a business you generally set an amount for the entire business. Ask your accountant how the price will be allocated, and get that answer in writing before the agreement is signed.

• Gather the original cost of each property sold and the expenses of selling it.
• Complete Schedule 3 and carry any taxable capital gain to line 12700.
• Ask about a reserve on Form T2017 if part of the price is paid after closing.
• Check eligibility for the capital gains deduction, claimed on line 25400, before you sign.
• Ask how the price will be allocated across assets, since depreciable property is treated separately.