Claiming a capital gains reserve
When you sell a capital property, you usually receive full payment at that time. However, sometimes you receive the amount over a number of years.
For example, you sell a capital property for $50,000 and receive $10,000 when you sell it and the remaining $40,000 over the next four years.
If this happens, you may be able to claim a reserve. Usually, a reserve allows you to report a portion of the capital gain in the year you receive the proceeds of disposition.
You may be able to claim a capital gains deduction and reduce your taxable income. For more information, see Line 25400 – Capital gains deduction.
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Who can claim a reserve?
Most people can claim a reserve when they dispose of a capital property.
Generally, you cannot claim a reserve in a tax year if you were in any of the following situations:
- 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
- You sold the capital property to a corporation that you control in any way
How do you calculate and report a reserve
If you claim a reserve, you still calculate your capital gain for the year as the proceeds of disposition minus the adjusted cost base and the outlays and expenses incurred to sell the property. From this, you deduct the amount of your reserve for the year. What you end up with is the part of the capital gain that you have to report in the year of disposition.
To deduct a reserve in any year, you have to complete Form T2017, Summary of Reserves on Dispositions of Capital Property. The information on the last page of Form T2017 explains how to calculate the maximum amount you can deduct as a reserve for a given year and the number of years for which you can claim the reserve.
Generally, the maximum period over which most reserves can be claimed is 4 years. However, a 9-year reserve period is provided for transfers to your child of family farm or fishing property (which includes shares of a family farm or fishing corporation, an interest in a family farm or fishing partnership, as well as land or depreciable property in Canada that you, your spouse or common-law partner, your parent or any of your children used in a farming or fishing business), and small business corporation shares, as well as gifts of non-qualifying securities made to a qualified donee.
Your children include any of the following:
- a person of whom you or your spouse or common-law partner is the legal parent
- your grandchild or great-grandchild
- your child’s spouse or common-law partner
- another person who is wholly dependent on you for support and who is, or was immediately before the age of 19, in your custody and under your control
If you claimed a reserve in the previous year, include that reserve in the calculation of your capital gains for the current year. For more information, see Capital gains deduction.
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Example
If you claimed a reserve in 2022, you have to include it in your capital gains calculation for 2023. Claim the new reserve that you have calculated for 2023 in the appropriate area on Form T2017. If you still have an amount that is payable to you after 2023, you may be able to calculate and claim a new reserve. However, you will have to include it in your capital gains calculation for 2024.
A capital gain from a reserve brought into income qualifies for the capital gains deduction only if the original capital gain was from a property eligible for the deduction. For a list of these properties, see Which capital gains are eligible for the capital gains deduction?.
Note
You do not have to claim the maximum reserve in a tax year (Year A). However, the amount you claim in a later year (Year B) cannot be more than the amount you claimed for that property in the previous year (Year A).
Including a previous year reserve in income
If you claimed a reserve in the previous year, include that reserve in the calculation of your capital gains for the current year.
For example, if you claimed a reserve in 2022, you have to include it in your capital gains calculation for 2023.
Claim the new reserve that you have calculated for 2023 in the appropriate area on Form T2017, Summary of Reserves on Dispositions of Capital Property.
If you still have an amount that is payable to you after 2023, you may be able to calculate and claim a new reserve.
However, you will have to include it in your capital gains calculation for 2024.
Reserve for a gift of non qualifying securities
If you donate a non-qualifying security (other than an excepted gift) to a qualified donee and have a capital gain, you may be able to claim a reserve in order to postpone the inclusion of the capital gain in income.
For gifts of non-qualifying securities, the reserve you can claim cannot be greater than the eligible amount of the gift.
You can claim this reserve for any tax year ending within 60 months of the time you donated the security. However, you cannot claim a reserve if the donee disposes of the security or the security ceases to be a non-qualifying security before the end of the tax year. If this happens, you will be considered to have made a charitable donation in that year and can claim the charitable donation tax credit.
Where a qualified donee has received a gift of a non-qualifying security (other than an excepted gift), no tax receipt may be issued and therefore no charitable donation tax credit may be claimed by the donor unless, within the 60-month period, the non-qualifying security ceases to be a non-qualifying security or has been disposed of in exchange for property that is not another non-qualifying security of the donor. For dispositions of non-qualifying securities by qualified donees, the disposition must be in exchange for property that is not another non-qualifying security of any party.
If the security is not disposed of within the 60-month period, you will not be required to bring the reserve back into income in the year following the end of that period.
To deduct this type of reserve, you have to complete Form T2017, Summary of Reserves on Dispositions of Capital Property.
Completing your Form T2017 and Schedule 3
Enter the amount from line 67060 of Form T2017 on line 19200 of Schedule 3.
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