Capital Gains (Losses)
19 What is a capital gains reserve? How is it calculated? Why does it exist?
Pooja Devi
A capital gain reserve can be utilized when you make a sale of capital property but don’t receive full payment. In most cases, you receive full payment on the capital property, but sometimes you may not receive the full refund at the time of sale. The capital gains reserve is intended to help defer tax on the capital gain until payment has been received. Note that there is a 5-year limit on the reserve to restrict people from deferring the gains indefinitely.
Who can claim a reserve
Although there are some restrictions – largely for non-residents, participants in related party transactions and for individuals who are exempt from paying tax – in general, most individuals and corporations can claim the reserve when they dispose of capital property. See ITA 40(2) for further information regarding limitations on who can claim the capital gains reserve.
How do you calculate the capital gains reserve?
The reserve is calculated each year and then brought back into income the following year. The reserve is based on the lesser of the following amounts:
- Proceeds not yet received / Total proceeds X Capital Gain
- 20% of the gain X (4 – number of preceding years ending after disposition)
This 2nd calculation effectively forces you to bring in a minimum of 20% of the gain multiplied by the number of years since the date of sale. I.e. By the 3rd you would need to have cumulatively recognized a minimum of 60% of the gain.
The reserve is optional. All or any of the existing reserve may be claimed each year. Remember that the prior year reserve is brought into income in the current year and then a new reserve is calculated.
Here is an example:
Mr. John sold a capital property for $500,000 on December 31, 2022. $50,000 was paid immediately in cash, $200,000 is payable on December 31, 2023, and $250,000 on December 31, 2024. The adjusted cost base of the property was $150,000 and the selling costs were $20,000. What is the capital gain reserve?
2022: Cost = $500,000; ACB = ($150,000); Selling Cost= ($20,000); Gain = $330,000
Less 2022 reserve, the lessor of:
|
20% calculation |
$ amount calculation |
|
330,000 (20%) (4-0) 330,000 * 80% = $264,000(lessor) |
330,000*450,000/500,000 = $297,000 |
|
Capital Gain = $66,000 ($330,000-$264,000) Taxable Capital Gain (1/2) = $33,000 |
|
2023: Inclusion of 2022 reserve of $264,000
Less 2023 reserve, the lessor of:
|
20% calculation |
$amount calculation |
|
330,000 (20%) (4-1) 330,000 * 60% = $198,000 |
330,000*250,000/500,000 = $165,000 (lessor) |
|
Capital Gain = $99,000 ($264,000 – $165,000) Taxable Capital Gain (1/2) = $49,500 |
|
2024: Inclusion of 2023 reserve of $165,000
Less 20124 reserve, the lessor of:
|
20% calculation |
$amount calculation |
|
330,000 (20%) (4-2) 330,000 * 40% = $132,000 |
330,000*0 /500,000 = $Nil (lessor) |
|
Capital Gain = $165,000 Taxable Capital Gain (1/2) = $82,500 |
|
Interactive content
Author: Harman Sandhu, January 2020
Author: Sheila Lai, January 2020
References and Resources:
Article – “Claiming a capital gains reserve” (Author: Government of Canada)
ITA – 40(1)(iii) and 40 (2)
October 2024
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