Capital Gain Reserve Carry Forward
If you have a capital gain, there may be an option to defer or reduce the capital gain tax. In some instances, all of the proceeds from a capital asset disposition will not be received in cash in the year of disposition, you can claim the reserve equal to that amount. For example, assume Mr. Lindon sold a property for a capital gain and received only 20% of the total proceeds in the year of sale. It would be reasonable to allow him to defer recognition of a part of capital gain. This deferral can be accomplished through the establishment of a capital gain reserve.
You cannot claim a reserve if you were not a Canadian resident or tax exempt at the end of the tax year or during the following year. Income tax requires that you include a minimum of 20% or the capital gain in income each year and on a cumulative basis entire reserve must be reported in your income over the five years. It must be noted that reserve is optional. If desired, the tax payer can report the entire gain in the year the property is sold.
Under ITA subsection 40(1), the maximum capital gain reserve that may be claimed in any year is limited to the lesser of:
– a reasonable amount, and
– 80% of the original capital gain in year 1, 60% in year 2, 40% in year 3, 20% in year 4, zero in year 5.
In any case, it is prudent to consult your accountant and discuss the circumstances.