# Capital Gains Reserve: Step-by-Step Solution Fatima sold land in 2024 for $120,000. She will receive $60,000 in 2024 and $60,000 in 2026. She wants to know how to claim a **capital gains reserve**. ## 1. Understand the Capital Gains Reserve - **Capital gains** are typically taxable in the year of sale. - However, if proceeds are received over multiple years, the Income Tax Act (Canada) allows a **reserve** to defer part of the gain. - The maximum reserve: up to 4 years after the sale (i.e., you must include at least 20% of the gain each year). ## 2. Calculate Total Capital Gain Assume Fatima's **Adjusted Cost Base (ACB) = $X** and **selling expenses = $Y**. \[ \text{Capital Gain} = \text{Proceeds} - \text{ACB} - \text{Selling Expenses} \] Given only proceeds, the steps below will use "Capital Gain" as a variable. ## 3. Determine Amount Receivable Each Year | Year | Proceeds Receivable | |------|---------------------| | 2024 | $60,000 | | 2025 | $ | | 2026 | $60,000 | - In 2024, Fatima receives **$60,000** (50%). - In 2026, she receives the remaining **$60,000** (50%). ## 4. Calculate Reserve for Each Year ### Year 1: 2024 Reserve formula: \[ \text{Reserve} = \text{Capital Gain} \times \left( \frac{\text{Proceeds Not Yet Received}}{\text{Total Proceeds}} \right) \] - **Proceeds not yet received at end of 2024:** $60,000 (2026 amount) - **Total proceeds:** $120,000 \[ \text{Reserve for 2024} = \text{Capital Gain} \times \left( \frac{60,000}{120,000} \right) = \text{Capital Gain} \times .5 \] - **Minimum inclusion:** At least 20% must be included, but here, 50% is due (so it meets the rule). **Taxable capital gain in 2024:** \[ \text{50% of Capital Gain} \] (Only half the gain is included in 2024) ### Year 2: 2025 - No proceeds received this year, but must bring in 20% of the original gain (minimum inclusion rule). - However, for practical purposes, the reserve from 2024 is reversed, and a new reserve is claimed for the balance due in 2026. **Proceeds not yet received at end of 2025:** $60,000 Reserve for 2025:** \[ \text{Reserve for 2025} = \text{Capital Gain} \times \left( \frac{60,000}{120,000} \right) = \text{Capital Gain} \times .5 \] **Taxable capital gain in 2025:** \[ \text{Reserve at end of 2024} - \text{Reserve at end of 2025} = \text{Capital Gain} \times .5 - \text{Capital Gain} \times .5 = \] So, **no taxable capital gain** in 2025 (since no proceeds received, and the reserve remains the same). ### Year 3: 2026 - Fatima receives the remaining $60,000. - **Proceeds not yet received at end of 2026:** $ \[ \text{Reserve for 2026} = \text{Capital Gain} \times = \] **Taxable capital gain in 2026:** \[ \text{Reserve at end of 2025} - \text{Reserve at end of 2026} = \text{Capital Gain} \times .5 - = \text{Capital Gain} \times .5 \] ## 5. Summary Table | Year | Taxable Capital Gain Included | |------|------------------------------| | 2024 | 50% of total capital gain | | 2025 | | | 2026 | 50% of total capital gain | ## 6. Final Answer **Fatima can claim a capital gains reserve in 2024 and 2025 for the $60,000 not yet received. She will include 50% of the capital gain in her 2024 income, none in 2025, and the remaining 50% in 2026 when she receives the final payment.** ### If you know the actual cost base and expenses, you can substitute and calculate the specific dollar amounts.