An investor sells an appreciated rental property and agrees to receive most of the price over several years through a vendor take-back mortgage. Which Income Tax Act mechanism can spread the capital gain over those years?
Correct Answer
B) The capital gains reserve, over at most five years
The capital gains reserve in s. 40(1) of the Income Tax Act lets a seller defer the part of the gain that relates to proceeds payable after the end of the year. The reserve is limited so that at least one-fifth of the gain is included each year, spreading the gain over at most five years (the year of sale and four more).
Why This Is the Correct Answer
The reserve is the lesser of a reasonable amount for proceeds payable after year-end and one-fifth of the gain multiplied by (4 minus the number of preceding years since the sale). That forces at least 20% of the gain into income each year, spreading it over up to five taxation years while the vendor take-back mortgage is paid.
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An Ontario investor wants to sell an appreciated rental property and buy a larger rental, deferring the capital gain the way US investors do with a section 1031 like-kind exchange. Under Canada's Income Tax Act, what is the position?
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An investor owns three properties: a principal residence, a cottage used personally 60% of the time and rented 40% of the time, and a pure rental property. For tax planning purposes, how should the cottage be treated?