- Capital Gain Reserves (Capital Gain Reserves)

Capital Gain Reserves

Subject: Capital Gain Reserves
Number: 06-26
Date: 10/13/2006

Capital Gains are taxable over five or ten years depending on the timing of the proceeds and the asset sold

When a capital property is disposed of, a taxpayer can claim a capital gain reserve for the proceeds to the extent that they have not yet been received. The individual is required to calculate as the reserve a “reasonable” portion of the gain.

Generally, the capital gain reserve is calculated as:

capital gain x balance receivable at the end of the taxation year;
selling price

This calculation is subject to another limitation. The reserve cannot exceed the lesser of:

The amount calculated above; and
One-fifth of the total capital gain x 4 minus the number of preceding taxation years
ending after the disposition

This means that, in the first year of disposition, not more than four-fifths of the gain can be taken as a reserve. Each year the calculation must be repeated to determine the amount of the reserve. Consequently, the capital gain will be taxed over a maximum of five years.

Where a transfer of a capital asset is made to a child, grandchild, or great-grandchild who is a resident of Canada, and the asset was:

Family farm property;
A share in the capital stock of a family farm corporation;
An interest in a family farm partnership; or
A share in the capital stock of a small business corporation,

the maximum capital gain reserve is calculated using a ten-year timeframe instead of five years. Consequently, in the first year a reserve of 90% could be claimed. The taxpayer has ten years to include the entire capital gain in income.

A taxpayer does not have to claim the maximum available reserve. He or she cannot claim a reserve in a subsequent year greater than the reserve claimed in the prior year. Therefore, if an individual claims a reserve of $5,000 in one year, the reserve in subsequent years can never be greater than that. A reserve cannot be claimed if the acquirer was a corporation, which, immediately after the acquisition of the capital property, was controlled directly or indirectly by the transferor of the property. The reserve is also disallowed for individuals who become non-residents during the year. If a reserve were claimed in the prior year, and the individual leaves Canada, a reserve cannot be taken for the year of departure. The prior year’s reserve will come into income in the year of departure with no reserve for the year of departure.

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