Up to ten years, not the usual five — because the buyer in this structure typically has no capital of its own.
Short answer
Up to ten years. The ordinary capital gains reserve lets a seller bring in as little as one-fifth of the gain per year over five years, but section 40(1.3) extends that to one-tenth per year over ten years for a qualifying business transfer to an employee ownership trust, and section 40(1.4) does the same for a qualifying cooperative conversion — because the buyer in both cases typically has no capital of its own and pays entirely out of future proceeds.
The ordinary capital gains reserve under section 40(1)(a)(iii) lets a seller who has not been paid in full defer part of the gain, on a formula that brings in a minimum of one-fifth of the gain each year, so the reserve runs out after five years regardless of when the note is actually paid.
Section 40(1.3) changes that formula specifically for a sale to an employee ownership trust: “that subparagraph is to be read as if the references in that subparagraph to ‘1/5’ and ‘4’ were references to ‘1/10’ and ‘9’ respectively, if the shares were disposed of by the taxpayer under a qualifying business transfer”. Section 40(1.4) extends the identical ten-year formula to a sale under a qualifying cooperative conversion.
The extension only applies to the specific transaction it names — a qualifying business transfer to an employee ownership trust, or a qualifying cooperative conversion — not to every deal where the buyer happens to be short of cash. An ordinary vendor-take-back note to an arm’s-length buyer, or a sale to a trust that does not meet the qualifying conditions, stays on the standard five-year reserve no matter how long the note actually takes to pay.
In the Case Files library, a ten-year reserve on a sale to an employee ownership trust is the direct example: a trust with no capital of its own, financed entirely by the seller’s own note, where the ordinary five-year reserve would have taxed the gain faster than the note ever paid it. a trust built to give four employees equity fell into the one ITA timing rule it was meant to avoid shows a related employee-ownership structure — shares held in trust for future employee-owners — that runs into a completely different ITA timing rule.
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