Capital Gains Reserve When Selling a Business in Instalments in Ontario

If a buyer pays you over several years, it would feel unfair to owe tax on the full gain in the year you sell, before you have received the money. The Income Tax Act has a tool for this called the capital gains reserve.

This article explains how the reserve works, how the five-year limit operates, and the cases where it is unavailable or runs longer. Your own numbers depend on your facts, so use this as a map for the conversation with your accountant.

What the reserve does

A capital gain is normally reported in the year you sell. When part of the sale price is payable after the end of that year, you can claim a reserve under Income Tax Act s. 40(1)(a)(iii). The reserve holds back part of the gain so it is taxed in a later year.

Remember that only one-half of a capital gain is taxable, so the reserve defers the taxable part of the gain. The gain itself is the proceeds less your adjusted cost base and the outlays and expenses of selling, such as commissions, legal fees and advertising.

How the five-year limit works

The reserve is the lesser of two amounts: a reasonable amount for the unpaid proceeds, and 1/5 of the gain multiplied by (4 minus the number of preceding years ending after the sale). The second amount shrinks each year.

The result is that at least 1/5 of the gain is taxed each year, and the whole gain is taxed within five years. The CRA describes the reserve period as generally up to four years, so the gain is included in income over five years in total.

If you are paid faster than the formula allows, the reserve is also limited to a reasonable amount for what is still unpaid. You file Form T2017, Summary of Reserves on Dispositions of Capital Property, to claim it.

Why spreading the gain can matter

Canadian personal tax rates rise with income. For 2025 the federal rates run from 14.5% up to $57,375 to 33% above $253,414. Ontario's rates for 2025 run from 5.05% up to $52,886 to 13.16% above $220,000. A taxable capital gain is added to your income and taxed at these combined marginal rates.

Spreading the gain across several years can keep some of it out of the higher brackets. Ontario's brackets effective January 1, 2026 differ slightly from the 2025 ones (for example, the first bracket runs up to $53,891 rather than $52,886), and an Ontario surtax can raise the effective rate for higher-income sellers, so your accountant should work from the figures for each year. A large gain sheltered by the exemption can also trigger alternative minimum tax, calculated on Form T691.

When the reserve is unavailable or runs longer

• Longer period: if qualified small business corporation shares are sold to your child who is resident in Canada, the reserve fraction becomes 1/10 and 9, spreading the gain over 10 years.
• Longer period: a 10-year reserve also applies to certain intergenerational sales to a corporation and to shares sold under a qualifying business transfer.
• No reserve for non-residents or tax-exempt sellers at the end of the year or at any time in the following year.
• No reserve if the buyer is a corporation you control, or a partnership where you are a majority-interest partner immediately after the sale.
• Deferred gains do not qualify for the capital gains deduction.

The last point is worth planning around. If you expect to claim the lifetime capital gains exemption, ask your accountant how it interacts with a reserve before you agree to a payment schedule.

What to do next

• Put the payment dates and amounts in the sale agreement.
• Gather your cost records and the expenses of selling so the gain can be calculated.
• Ask an accountant to model your tax each year with the reserve and without it.
• Confirm that you and the buyer are not caught by an exception.
• Have a lawyer review the deal so the payment terms match the tax plan.

Frequently asked questions