Capital Gains Tax Income Reserve

When filing income tax, if a sale of capital property (i.e. rental property) results in a capital gain and a portion of the proceeds are not due until after the year-end, then you may claim a reasonable reserve for the “unrealized” unpaid portion of the gain as a means of “tax minimization” for taxes owing in the current year.

At least 1/5 of the capital gain must be included in income each year unless proceeds become payable earlier. The exception is for sale of qualified farm, fishing property or shares in a qualified small business corporation to the taxpayer’s child, which permit a 1/10 of gain which must be taken into income. Note, if the gain is an “ordinary income gain” a reserve for the unpaid portion may be taken for up to 36 months from the date of sale if:

-the sale was for land which resulted in ordinary income with proceeds due after the year end;

or -the sale of property, other than land, results in ordinary income gain with proceeds due more than 2 years after the sale date.

A reserve claimed in one year must be taken into income in the next year.  A new reserve is set up if proceeds are still unpaid and claimed at the end of that year for the maximum period as noted above.

The above information is of a general nature only and should not be relied upon for specific situations.  Call Marlies Y Hendricks, CPA at 416-766-3941 or submit email enquiry form below to set up a consultation.