My client sold shares and the buyer pays over several years. How does the capital gains reserve work, and how much can they defer?
A capital gains reserve lets your client defer the gain on sale proceeds not yet due, but at least 20% of the gain is taxed each year, so all of it lands within five years. Family farm or fishing property and small business shares sold to a child get ten years at 10%. Claim it on Form T2017.
How much of the gain can your client reserve each year?
The reserve for a year is the lesser of two limits: a reasonable amount for the proceeds payable after the end of the year, and a cap that falls by one fifth of the gain each year, so it reaches zero four years after the year of sale laws-lois.justice.gc.ca. That is subparagraph 40(1)(a)(iii) of the Income Tax Act.
Form T2017 turns both limits into arithmetic. Limit (i) is the capital gain times the amount payable after year end divided by the proceeds of disposition. Limit (ii) is the capital gain times the percentage below for that year canada.ca.
| Year | Cap for most property (five years) | Cap for qualifying transfers to a child (ten years) |
|---|---|---|
| Year of sale | 80% | 90% |
| 1st year after | 60% | 80% |
| 2nd year after | 40% | 70% |
| 3rd year after | 20% | 60% |
| 4th year after | 0% | 50% |
| 5th year after | 40% | |
| 6th year after | 30% | |
| 7th year after | 20% | |
| 8th year after | 10% | |
| 9th year after | 0% |
The CRA describes the standard track as a four year reserve, which means the gain is included over five years, and the longer track as a nine year reserve, included over ten years canada.ca. At the maximum claim, at least 20% (or 10%) of the gain comes into income every year, however slowly the buyer pays.
Worked example: the whole gain is taxed before the buyer finishes paying
Your client sells shares of a private company to an arm's length buyer in 2026 for $500,000. The adjusted cost base is $100,000, so the capital gain is $400,000. The buyer pays $50,000 at closing and the $450,000 balance in one payment in 2031.
Limit (i) stays at $360,000 every year until 2031 ($400,000 × $450,000 ÷ $500,000). Limit (ii) is lower each year, so it sets the reserve.
| Year | Payable after year end | Limit (i) | Limit (ii) | Reserve claimed | Capital gain reported | Taxable at 50% |
|---|---|---|---|---|---|---|
| 2026 | $450,000 | $360,000 | $320,000 (80%) | $320,000 | $80,000 | $40,000 |
| 2027 | $450,000 | $360,000 | $240,000 (60%) | $240,000 | $80,000 | $40,000 |
| 2028 | $450,000 | $360,000 | $160,000 (40%) | $160,000 | $80,000 | $40,000 |
| 2029 | $450,000 | $360,000 | $80,000 (20%) | $80,000 | $80,000 | $40,000 |
| 2030 | $450,000 | $360,000 | $0 | $0 | $80,000 | $40,000 |
| Total | $400,000 | $200,000 |
Each year after 2026, the prior year's reserve comes back into the gain and the new reserve is deducted, which is how subparagraph 40(1)(a)(ii) works laws-lois.justice.gc.ca. In 2027 that is $320,000 minus $240,000, so $80,000. The full $400,000 gain is reported by 2030, one year before the $450,000 arrives, so your client funds five years of tax from $50,000 of cash. The taxable column uses the 50% inclusion rate, which still applies for 2026 (see the inclusion rate page).
If the same shares were qualified small business corporation shares sold to your client's child, the 2026 cap would be 90%, or $360,000, and at least $40,000 of gain (10%) would be reported each year from 2026 to 2035, as long as enough of the price stays unpaid.
Which sales get ten years instead of five?
Subsection 40(1.1) swaps the 1/5 and 4 in the formula for 1/10 and 9 when your client sells to their child, the child was resident in Canada immediately before the sale, and the property was one of these laws-lois.justice.gc.ca:
| Property sold to the child | Where it is defined |
|---|---|
| Land in Canada, or depreciable property in Canada of a prescribed class, used in a farming or fishing business carried on in Canada by your client, their spouse or common law partner, a child or a parent | ITA 40(1.1)(c)(i) |
| A share of a family farm or fishing corporation, or an interest in a family farm or fishing partnership | ITA 70(10) |
| A qualified small business corporation share | ITA 110.6(1) |
The CRA also allows the ten year track for a qualifying business transfer, for a qualifying cooperative conversion under proposed changes, and for an intergenerational business transfer of farm, fishing or small business shares to a corporation controlled by your client's children. The intergenerational transfer needs Form T2066, completed by the transferor's filing due date for the year of sale and kept in their records rather than filed with the CRA canada.ca.
For these rules, "child" includes a grandchild, a great grandchild, a child's spouse or common law partner and certain dependants. For intergenerational transfers only, it also reaches certain nieces, nephews and related persons canada.ca.
Who cannot claim a reserve?
Paragraph 40(2)(a) shuts the reserve off for a year in these cases laws-lois.justice.gc.ca:
| Situation | Effect |
|---|---|
| Your client was not resident in Canada at the end of the year, or at any time in the following year | No reserve for that year |
| Your client was exempt from Part I tax at the end of the year, or at any time in the following year | No reserve for that year |
| The buyer is a corporation your client controls, directly or indirectly, in any manner, immediately after the sale | No reserve on that sale |
| The buyer is a corporation that controls your client, or a partnership in which your client holds a majority interest | No reserve on that sale |
The second test in the first row is the one that bites. A client who sells in 2026 and moves abroad in 2027 loses the 2026 reserve too, because the residence test looks at the following year canada.ca. The controlled corporation rule catches the classic sale of shares to your client's own holding company for a note; that transaction is usually planned under section 85 instead.
How does the reserve move through the T1 each year?
Individuals other than trusts claim the reserve on Form T2017, Summary of Reserves on Dispositions of Capital Property; the 2025 version is the latest posted canada.ca. The net of last year's reserve minus this year's reserve, for every disposition, goes to line 19200 of Schedule 3
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Schedule 3 is the capital gains schedule filed with the T1 canada.ca. Your client has to file a return for every year a reserve is brought back into income, even when that is the only income left from the sale
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The reserve is optional. Your client can claim less than the maximum, but a later year's claim can never exceed the amount claimed for that property the year before canada.ca. Claiming less in a low income year and then trying to claim more later doesn't work.
Sources
Does a reserve brought into income qualify for the lifetime capital gains exemption?
Yes, but only if the original gain was from property that qualified for the capital gains deduction canada.ca. Spreading a qualified small business share sale over several years can also let the gain line up with years when the lifetime exemption room is available.
Can my client claim the reserve if the full price is paid in the year of sale?
No. Limit (i) depends on proceeds payable after the end of the year, so if nothing is owing at December 31, the reserve is zero laws-lois.justice.gc.ca.
Is there a reserve when my client donates securities that are not yet qualifying?
Yes. For a gift of securities that are not qualifying securities, your client can claim a reserve for any tax year ending within 60 months of the gift, up to the eligible amount of the gift, and it ends once the donee disposes of the securities canada.ca. For gifts of publicly listed shares, see the donating securities page.
Does the ten year reserve need an election?
Only for an intergenerational business transfer. A sale that meets the 40(1.1) conditions gets the longer track automatically laws-lois.justice.gc.ca, while an intergenerational transfer to a corporation controlled by your client's children needs Form T2066, completed by the transferor's filing due date and kept on file in case the CRA asks for it
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General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.