Tax Tip Thursday

Spring is in the air and the housing market it heating up, so I thought I would talk about a fairly unknown, but powerful tax saving strategy relative to capital gains.

The most common scenario is with real estate, but it could apply to other capital gains situations as well.

If you are selling a property — especially if you are getting paid over time — there is a strategy called a capital gains reserve… and it can dramatically reduce your tax hit in the year of sale.

It can be for the sale of any real estate that attracts capital gains.

Sometimes sales are structured in a way other than full payment on closing.  You might want to give consideration to structuring a real estate transaction to one of these other strategies, especially if family is involved.

• Vendor take-back mortgages
• Installment payments
• Earn-outs or staged payouts

If you sell a property for $1 million…but only receive $200,000 upfront, then this is where the capital gains reserve comes in — and it is one of the most underused tools in Canadian tax planning.

A capital gains reserve allows you to spread the taxable gain over up to 5 years, instead of reporting it all in year one.

In simple terms:
You only pay tax as you collect the money.

Let’s say:

• You sell a property and trigger a $500,000 capital gain
• Normally, you would report the full gain this year

That could mean hundreds of thousands in taxable income in one shot.

But if you are being paid over a period of time, you can spread out the capital gains potentially.

With a capital gains reserve, you would be able to pay essentially 20% of the total capital gain.

What does that do?

• Keeps you in lower tax brackets
• Improves cash flow
• Means you are not paying tax on money you have not received

Important rules:

1. The reserve is only up to 5 years
2. You must actually be owed money — this only works when proceeds are unpaid
3. Each year, a minimum portion of the gain must be brought into income (20%)

A capital gains reserve can:

• Smooth income across multiple years
• Help avoid OAS clawback
• Reduce exposure to top marginal tax rates
• Coordinate with retirement timing
• Pair with other strategies like income splitting or loss utilization

In other words — it is not just deferral… it is control.

So if you are selling a property — or even thinking about it — do not just focus on the price.

Also focus on how you get paid.

Structuring the transaction differently could save you tens — or even hundreds — of thousands in tax.

At a minimum, you can defer the taxes.  If you are selling a property, talk to us about helping you plan it.

Just remember, it is the same sale and same price, but potentially a very different tax bill.  It just depends on how  you structure it.

And last but not least – make sure you get your taxes filed by April 30 – even if you can not pay the bill, make sure you file the taxes – it will save you at least 5% in penalties.

I am certain you do NOT want to pay the CRA EXTRA money!

Plan ahead for a smooth tax season with capital gains reserves! Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.