How long can you spread a capital gain when selling directly to your child?

The rule: the extended reserve, and who it actually reaches

The ordinary reserve in subparagraph 40(1)(a)(iii) lets a taxpayer defer part of a capital gain over five years as deferred proceeds are collected. Subsection 40(1.1) doubles that period to ten years specifically where the buyer is the taxpayer’s own child, resident in Canada, and the property being sold is qualifying farmland, depreciable farm or fishing property, or shares of a family farm, fishing or small business corporation.

When it changes

A different, separate extended reserve in subsection 40(1.2) applies where shares of a corporation are sold not to the child directly but to another corporation controlled by the child, and the intergenerational conditions in subsection 84.1(2.31) or (2.32) are satisfied. That route only works where the purchaser is a corporation; selling directly to the child in their personal capacity relies on subsection (1.1) instead, and the two are not interchangeable.

Where this played out — Case Files

In one file, the founder sold directly to his daughter rather than to a corporation she controlled, and the advisors had modelled the wrong subsection entirely — the ten-year reserve under subsection (1.1) applied, not the corporation-purchaser route under subsection (1.2).

Sources

• • Income Tax Act s.40(1)(a)(iii), s.40(1.1) and s.40(1.2) — laws-lois.justice.gc.ca.
• • Income Tax Act s.84.1(2.31) and (2.32), the intergenerational conditions the corporation-purchaser route depends on — cited for the contrast, not separately quoted here.
• • Treadstone Law — capital gains reserve: spreading tax over multiple years — on point for the general reserve mechanic; it covers the standard five-year rule and does not address the child-specific extension, which is the point here.