- An earn-out ties part of the price to future results, while a vendor take-back loan means you lend part of the price to the buyer; both leave you exposed to the buyer's performance.
- When part of the price is payable after the end of the year, you may be able to claim a capital gains reserve, but at least 1/5 of the gain is taxed each year.
- How the price is allocated among assets and whether a reserve is allowed can change your tax bill, so get advice before you sign.
Buyers often cannot or will not pay the whole price on closing. You may be offered part of it later, either as a loan you extend to the buyer or as an amount that depends on how the business performs.
These structures can bridge a gap in price, but they shift risk to you. This article explains how they generally work, what to watch for, and how the tax rules treat money received over time.
How the two structures work
- Vendor take-back (VTB) financing: you accept a promise to pay part of the price later, usually with interest and repayment terms, often backed by security.
- Earn-out: part of the price depends on results after closing, such as revenue or profit over a set period, so the final amount is not known at signing.
They can be combined. In both cases you remain tied to the buyer's success after closing, which is why the contract wording matters.
Risks for the seller
- Non-payment: if the buyer struggles, you may be paid late or not at all, so ask about security and what happens on default.
- Control: under an earn-out the buyer usually runs the business, so the agreement should address how results are measured and what the buyer may or may not change.
- Disputes: vague definitions of profit or revenue are a common source of disagreement, so precise drafting helps.
- Valuation gaps: an earn-out is often a way to bridge different views of value. The CRA defines fair market value as the highest price obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, with neither party under compulsion to transact.
The capital gains reserve
Only one-half of a capital gain is taxable. The gain is generally the proceeds less the adjusted cost base and the outlays and expenses of selling, such as commissions, legal fees and advertising.
When part of the price is payable after the end of the year, you can claim a reserve. It is the lesser of a reasonable amount for the unpaid proceeds and 1/5 of the gain x (4 minus the number of preceding years ending after the sale), so at least 1/5 of the gain is taxed each year and the whole gain is taxed within five years. The reserve is claimed on Form T2017.
Whether a contingent earn-out amount counts as a reasonable unpaid amount depends on the terms, so have an accountant review it. Also note that gains held back under a reserve do not qualify for the capital gains deduction.
When the reserve is longer or unavailable
| Situation | Reserve result |
|---|---|
| Qualified small business corporation shares sold to your child resident in Canada | The reserve fraction becomes 1/10 and 9, spreading the gain over 10 years |
| Intergenerational or qualifying business transfers | A 10-year reserve can also apply if the conditions are met |
| You were not resident in Canada, or were tax-exempt, at year end or at any time in the following year | No reserve is allowed |
| Buyer is a corporation you control, or a partnership in which you are a majority-interest partner | No reserve is allowed |
Allocation, assets and what to do next
In an asset sale, the price is allocated among the assets, and the part reasonably attributable to a property is its proceeds for you and its cost for the buyer. Allocating more to depreciable equipment can raise your tax, because recaptured depreciation is included in income in full.
- Decide how much risk you can accept and whether you want security for any unpaid amount.
- Have a lawyer draft payment terms, default remedies and, for an earn-out, the exact measurement formula.
- Ask an accountant whether a reserve is available and how it affects each year's income.
- Agree on the price allocation in the sale agreement and keep it consistent with what each side reports.
- Check whether the sale triggers GST/HST questions, since an asset purchase can be subject to GST/HST unless the parties elect.
Frequently asked questions
Is the tax on a vendor take-back loan due all at once?
Not necessarily. If part of the price is payable after the end of the year, a reserve may let you spread the gain, with at least 1/5 taxed each year. Some situations, such as sales to a corporation you control, do not allow a reserve.
How long can the gain be spread out?
Generally the reserve period is up to four years, so the gain is included over five years in total. Sales of qualifying shares to your child can spread it over 10 years.
Does the allocation of the price matter to me as seller?
Yes. Each part of the price is treated separately, and allocating more to depreciable equipment can increase recaptured depreciation included in your income.
Can I use the capital gains exemption on the deferred part?
Deferred gains, such as those held back under a reserve, do not qualify for the capital gains deduction. Speak with a tax advisor about how to plan around that.
Sources
- CRA Guide T4037, Capital Gains – 2025 — canada.ca
- Income Tax Act, s. 38 — Justice Laws (federal)
- Income Tax Act, s. 40(1)(a)(iii) — Justice Laws (federal)
- CRA – Buying a business — canada.ca
- Income Tax Act, s. 68 — Justice Laws (federal)
- Income Tax Act, s. 13(1) — Justice Laws (federal)
- CRA Information Circular IC89-3, Policy Statement on Business Equity Valuations — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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