When a capital property is disposed of, a taxpayer can claim a capital gain reserve for the proceeds to the extent that they have not yet been received. The individual is required to calculate as the reserve a “reasonable” portion of the gain.
Generally, the capital gain reserve is calculated as:
This calculation is subject to another limitation. The reserve cannot exceed the lesser of:
This means that, in the first year of disposition, not more than four-fifths of the gain can be taken as a reserve. Each year the calculation must be repeated to determine the amount of the reserve. Consequently, the capital gain will be taxed over a maximum of five years.
Where a transfer of a capital asset is made to a child, grandchild, or great-grandchild who is a resident of Canada, and the asset was:
the maximum capital gain reserve is calculated using a ten-year timeframe instead of five years. Consequently, in the first year a reserve of 90% could be claimed. The taxpayer has ten years to include the entire capital gain in income.
A taxpayer does not have to claim the maximum available reserve. He or she cannot claim a reserve in a subsequent year greater than the reserve claimed in the prior year. Therefore, if an individual claims a reserve of $5,000 in one year, the reserve in subsequent years can never be greater than that. A reserve cannot be claimed if the acquirer was a corporation, which, immediately after the acquisition of the capital property, was controlled directly or indirectly by the transferor of the property. The reserve is also disallowed for individuals who become non-residents during the year. If a reserve were claimed in the prior year, and the individual leaves Canada, a reserve cannot be taken for the year of departure. The prior year’s reserve will come into income in the year of departure with no reserve for the year of departure.
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