Capital Gains Reserve when selling Property


You may realize a capital gain on property, like real estate or marketable securities, if your selling price (net of costs like commissions or legal fees) exceeds your cost of the property. For income tax purposes, only 50% of this gain is included in your income and subject to tax.

Sometimes the terms of sale provide that some of the proceeds won’t be receivable until after the year of sale. To alleviate having to pay tax on the full gain, when only partial proceeds have been received, you may be entitled to claim a “capital gain reserve”. This reserve is basically a deduction in your tax return against the full amount of the capital gain added to income. However, even if a reserve is claimed, for each year a portion of the capital gain is added to income. The amount added is a function of the amount of proceeds receivable per year, and a minimum amount that ensures that the entire gain will be included in income over 5 years.

The reserve is optional. It might not be claimed if you have capital losses that could offset the capital gain, or if you expect to be in a higher tax bracket in future years.

Assuming you choose to claim it, the capital gain reserve (i.e. the deduction) is the lesser of two amounts:

  • The portion of the capital gain that relates to the proceeds that are due after the year – multiply the capital gain by the percentage of uncollected proceeds.
  • A set percentage of the capital gain such that at a minimum, at least 20% of the gain, cumulatively, is included in income each year.

Note that you cannot claim the reserve if you sell property to a corporation or partnership that is controlled by you immediately after the sale.  Please contact your accountant for more information if this applies to you.