The gain lands in the taxation year of the disposition, not the year the money arrives. Subparagraph 40(1)(a)(iii) then allows a deduction — the capital gains reserve — for proceeds payable after the year end, capped by a formula that puts the whole gain into income by the fourth taxation year after the disposition.
Key takeaways
SECTION 01 OF 10
Section 40, marginal note General rules, measures the gain at subparagraph (1)(a)(i): “if the property was disposed of in the year, the amount, if any, by which the taxpayer’s proceeds of disposition exceed the total of the adjusted cost base to the taxpayer of the property immediately before the disposition and any outlays and expenses”. Payment appears nowhere in it.
Proceeds is the price agreed. Section 54 includes “the sale price of property that has been sold”; s. 248(1) makes a disposition include “any transaction or event entitling a taxpayer to proceeds of disposition”. A vendor note, a holdback and a deferred instalment are proceeds on the closing day (the capital gains reserve; earn-out, holdback or vendor note).
SECTION 02 OF 10
Claimed, not automatic: “such amount as the taxpayer may claim”, for an individual “in prescribed form filed with the taxpayer’s return of income” (Form T2017), “as a deduction, not exceeding the lesser of” two amounts.
Clause (C) is the cash test: “a reasonable amount as a reserve in respect of such of the proceeds of disposition of the property that are payable to the taxpayer after the end of the year as can reasonably be regarded as a portion of the amount determined under subparagraph 40(1)(a)(i)”. Clause (D) is the time test: “an amount equal to the product obtained when 1/5 of the amount determined under subparagraph 40(1)(a)(i) in respect of the property is multiplied by the amount, if any, by which 4 exceeds the number of preceding taxation years of the taxpayer ending after the disposition of the property”.
SECTION 03 OF 10
It allows 4/5 of the gain in the disposition year, then 3/5, 2/5, 1/5, and zero in the fourth year after. The CRA guide agrees: “the maximum period over which most reserves can be claimed is four” years, the gain in income across five.
Illustrative parameters of my own, not data: price $2,000,000, cost base $200,000, $400,000 at closing and on four anniversaries. The gain is $1,800,000, clauses (C) and (D) both give $1,440,000, and $360,000 enters income. Over ten years (D) still caps at $1,440,000: $360,000 of gain against $200,000 received, and $1,000,000 unpaid when the reserve ends. Years, not dollars owed (instalment sales).
SECTION 04 OF 10
The add-back is total. Subparagraph 40(1)(a)(ii) makes the later gain “if the property was disposed of before the year, the amount, if any, claimed by the taxpayer under subparagraph 40(1)(a)(iii) in computing the taxpayer’s gain for the immediately preceding year”, against which a smaller reserve is deducted.
A ceiling that ratchets: “You do not have to claim the maximum reserve in a tax year”, but “the amount you claim in a later year (Year B) cannot be more than the amount you claimed for that property in the previous year (Year A)”. Exemption eligibility travels with the original gain — it qualifies “only if the original capital gain was from a property eligible for the deduction” — settled at the disposition on the 24-month tests.
SECTION 05 OF 10
That is clause (C)’s test. The CRA guide puts it otherwise: “a reserve allows you to defer a portion of the capital gain from the disposition of property in the year based on the portion of the proceeds of disposition not yet received”.
Payable after the year end and not yet received are not the same test. A November instalment left unpaid is unreceived but not payable after the year end. The statute governs; the guide is administrative description, and I could not source a reconciliation of the two. The agreement’s dates decide: holdback or vendor note, note terms, vendor take-backs.
SECTION 06 OF 10
Subsection 40(2), Limitations, provides that it “does not apply to permit a taxpayer to claim any amount under that subparagraph” in three cases.
Status, reaching forward a year: “the taxpayer, at the end of the year or at any time in the immediately following year, was not resident in Canada or was exempt from tax under any provision of this Part”. A related corporate buyer: “the purchaser of the property sold is a corporation that, immediately after the sale” “was controlled, directly or indirectly, in any manner whatever, by the taxpayer”, or by whoever controls the taxpayer. A related partnership: “the purchaser of the property sold is a partnership in which the taxpayer was, immediately after the sale, a majority-interest partner”.
A sale to your own holding company on a note produces the whole gain in one year; emigrating the year after closing removes it retrospectively. The CRA restates this loosely — “You sold the capital property to a corporation that you control in any way” — a paraphrase, not the provision.
SECTION 07 OF 10
Four subsections read clause (D) with 1/10 and 9 for 1/5 and 4. Subsection 40(1.1) needs “the property was disposed of by the taxpayer to the taxpayer’s child”, that child resident in Canada, and farm or fishing property, a family farm or fishing corporation share, or “a qualified small business corporation share of the taxpayer”.
The others turn on the transaction: 40(1.2), shares sold to a corporation “if the conditions set out in subsection 84.1(2.31) or (2.32) are satisfied”; 40(1.3), “if the shares were disposed of by the taxpayer under a qualifying business transfer”, the employee ownership trust route; 40(1.4), “if the shares were disposed of by the taxpayer under a qualifying cooperative conversion”. The guide confirms “a nine year reserve period is provided for in certain circumstances”, “resulting in the total capital gain included in income over 10 years”. A category of transferee, not a reward for a long schedule — the same terms to an unrelated buyer get five years, which is what makes a gradual sale to an employee a different question.
SECTION 08 OF 10
Measured on “the amount determined under subparagraph 40(1)(a)(i)”, a capital gain, it leaves income outside. Paragraph 12(1)(g) catches an amount “dependent on the use of or production from property” — the wording that reaches an earn-out (tax on money not yet received; earn-out proceeds). Contingent consideration is taxed as it arrives and cannot be spread.
Paragraph 12(1)(b), Amounts receivable, does the same for receivables: “any amount receivable by the taxpayer in respect of property sold or services rendered in the course of a business in the year, notwithstanding that the amount or any part thereof is not due until a subsequent year” (gain or business income).
Subsection 13(1), Recaptured depreciation, provides that “the excess shall be included in computing the taxpayer’s income of the year”. “Reserve” appears nowhere in section 13 — zero occurrences in 19,860 words, fetched twice on 2 September 2026. Recapture falls into the closing year in full while the gain beside it spreads (two levels of tax on an asset sale).
SECTION 09 OF 10
Subsection 249(1), Definition of taxation year: “In this Act, except as expressly otherwise provided, a taxation year is” “in the case of a corporation or Canadian resident partnership, a fiscal period”, and “in any other case, a calendar year”. An individual has no choice of year end: the gain falls in the calendar year of the disposition.
A vendor corporation is on its fiscal period, so one closing date sits in different years for it and its shareholder; the deemed year end on a change of control is a further rule. Clause (D) counts “the number of preceding taxation years of the taxpayer ending after the disposition” — boundaries crossed, not months elapsed (timing within a year; year-end choice). It describes what the rules count, not when to close.
SECTION 10 OF 10
Filing and payment differ. Para. 150(1)(d) sets April 30, or June 15 for “an individual who carried on a business in the year”; 150(1)(a) gives a corporation “within six months after the end of the year”. But s. 248(1) fixes an individual’s balance-due day at “April 30 in the following taxation year”, and s. 157(1)(b) a corporation’s remainder “on or before its balance-due day for the year”. A seller filing on June 15 owed the money on April 30.
Subsection 156(1) sets instalments “on or before March 15, June 15, September 15 and December 15 in the year” of 1/4 of either “the amount estimated by the individual to be the tax payable” or “the individual’s instalment base for the preceding taxation year”, and s. 161(4.01) measures interest by whichever gives “the least total amount of such parts or instalments”. Since Regulation 5300 makes that base “the individual’s tax payable under Part I of the Act for the year”, the sale year’s tax sets the next year’s instalment base.
Subsection 156.1(2) exempts an individual only where “the individual’s net tax owing for the particular year, or for each of the 2 preceding taxation years, does not exceed the individual’s instalment threshold” — $3,000, or $1,800 for “an individual resident in the Province of Quebec at the end of the year”. Miss them and s. 161(2) charges “interest at the prescribed rate on the amount that the taxpayer failed to pay”, and s. 163.1 adds a penalty of “50% of the amount, if any, by which” it exceeds the greater of $1,000 and a quarter of what it would have been (quarterly instalments; corporate deadlines; instalment guide; the gain on a sale).
No, not by default. The reserve formula in clause (D) caps the deduction at 1/5 of the gain per year regardless of the payment schedule, so a ten-year payment plan still puts the whole gain into income across five taxation years — the clock counts years since the disposition, not dollars still owed.
No. Subsection 40(2) blocks the reserve where the purchaser is a corporation controlled, directly or indirectly, by the seller (or by whoever controls the seller) immediately after the sale, along with sales to a partnership where the seller becomes a majority-interest partner — the whole gain lands in one year instead.
Yes, in some cases. Subsection 40(1.1) allows a nine-year reserve, spreading the gain over ten years, where property is disposed of to the taxpayer’s Canadian-resident child — but only for farm or fishing property, family farm or fishing corporation shares, or qualified small business corporation shares.
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