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Capital Gain Reserve - Property Disposed of to a Child

Income Tax Act s. 40(1.1)

This reserve is available for the deferral of capital gain on disposals of certain property to your child, when the proceeds are received over a number of years.  The reserve applies to dispositions to your child of

The reserve is calculated using the following formula:

capital gain x amount payable after the end of the year
total proceeds of disposition

The reserve can be claimed up to a maximum of nine years, which spreads out the capital gain over 10 years.  There is a maximum reserve that can be claimed in each year.  The maximum is calculated as a percentage of the capital gain.  The maximum percentage is:

See Capital Gain Reserve - Other for an example of this calculation over a period of 5 years, with a note about the effect of the inclusion rate for capital gains and losses, which has changed effective June 25, 2024.

Therefore, to spread out the gain over the maximum 10 years, you would have to receive your proceeds of disposition over at least 10 years.

It is not necessary to claim the maximum allowed reserve in any year.  However, if a reduced reserve is claimed in a year, the reserve claimed in the following year cannot exceed that amount.  For instance, if in the year of sale 45% of the capital gain was claimed as a reserve, then the maximum reserve that could be claimed in the next year would also be 45%.  If the 45% maximum was claimed in the next year, the capital gain would be zero, because amount of capital gain in each year is equal to the reduction in the amount of the reserve from the previous year.  If a higher reserve could be claimed in a subsequent year, the result would be the creation of a loss.  This is not allowed.

A person may not have to claim the maximum reserve in a particular year if they have capital losses to offset the capital gain, or if they have business losses to reduce taxable income.  They might also want to shift income to the current year from the coming year, if they know that they will have higher income in the coming year.

If the property is eligible for the capital gains deduction, such as qualified farm property (QFP), the capital gain reserve is determined first, and then the capital gains deduction is applied.

See the examples in Capital Gains Reserve - All other property to understand how the calculation works.  The calculation in that article is the same, except that the capital gain is spread out over 5 years instead of 10 years.

Tax Tip:  If you want to transfer certain capital property to your child, you could take a promissory note in return so that you can spread your gain over 10 years.  Get professional advice on this!!

TaxTips.ca Resources

Intergenerational Business Transfers of Corporations

Lifetime Capital Gains Exemption (LCGE)

Revised: September 20, 2024