Generally, when your clients trigger a capital gain from the sale of property, they have to pay tax on that gain. But if they don’t receive all the proceeds upfront, they may defer their tax liability by claiming a capital gains reserve.
Generally, CRA allows a maximum of five years for you to claim a reserve, however you are allowed up to ten years for capital gains that arise from the transfer of qualifying farm or fishing property, or small business corporation shares, to a taxpayers’ children. Basically, in both cases, they get to defer a percentage of the capital gain every year until they report the entire gain.
CRA has a prescribed schedule outlining the maximum annual reserve. For example, with most assets, your client can claim a reserve of up to 80% of the capital gain in the year of the sale, 60% in the first year following the sale, 40% in the second year and 20% in the third year. The allowances vary slightly when you’re dealing with qualified farm and fishing property or gifts to a qualified donee.
To claim the reserve for your client, you should fill out and submit Form T2017 (Summery of Reserves on Dispositions of Capital Property). Then, transfer the relevant amounts to Schedule 3 of their general income tax return.
Before helping your clients claim this reserve, you may also want to look into the capital gains lifetime exemption. If they qualify, this exemption may help them eliminate their capital gains entirely. In contrast, the reserve simply allows your clients to delay their gains.