In general, a capital gains reserve can be claimed where a taxpayer does not receive the full proceeds on the sale of a capital property. A business reserve can be claimed where a taxpayer has received funds but has not completed the service or transferred the property. This defers the gain until proceeds are received (subject to certain limits). In both of these situations, there are limitations as to when the reserves can be claimed. In the recent Proposed Amendments of December 20, 2002, the Department of Finance has proposed further limitations.
For capital gains, a reserve is disallowed when the capital property is sold to a corporation related to the vendor. A capital gains reserve will now not be allowed when the property is sold to a partnership where the taxpayer is a majority interest partner. In general terms, a "majority interest partner" is a partner who is entitled to over 50% of the income or over 50% of the assets of the partnership.
The business reserve denial has been extended to sales to a corporation that:
(a) was controlled by the taxpayer;
(b) was controlled by a person that controls the taxpayer; or
(c) controls the taxpayer.
As well, the business reserve will be denied where the purchaser was a partnership in which the taxpayer was a majority interest partner.
Careful consideration must be given as to when the capital gains reserve and business reserve are now available. Both of these changes apply to any dispositions after December 20, 2002.
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