How does the capital gains reserve work in Canada if I get paid over several years?

This answer covers Canadian federal tax law, which applies in every province.

A capital gains reserve lets you spread a gain over time when you are paid after the year of sale. For most capital gains, you can claim a reserve for a maximum of four years after the year of sale, so the gain is included in income over five years. You claim it on Form T2017 and enter line 31 of T2017 on line 19200 of Schedule 3.

At least 1/5 of the gain is included each year, starting with the year of sale. You need not claim the maximum reserve, but a later-year claim cannot exceed the amount claimed for that property the previous year. A reserve claimed last year must be brought into this year's gain.

Exceptions apply. For transfers to a child of family farm or fishing property or qualified small business corporation shares, and for qualifying business transfers, the reserve runs nine years, so the gain is included over 10 years. You generally cannot claim a reserve if you were a non-resident, were exempt from tax, or sold the property to a corporation you control in the relevant tax year or the following year. A lawyer or accountant can confirm how this applies to your sale.