How to Defer Capital Gains Tax on Real Estate Sales

Allan Madan, CA
 Apr 15, 2015

If you have a capital gain on the sale of real estate but have not received the entire payment, you can actually defer paying tax on that capital gain by using the capital gains reserve mechanism.

For anyone who has made a profit on the sale of real estate in Canada this year, this article is of particular importance.  We will reveal a tax loophole that will allow you to delay or defer the tax on the capital gains.  It is also important to distinguish between capital gains and business income, to learn more please read this article on taxes on flipping Canadian real estate – capital gains vs. business income.

picWhen you sell a property in Canada, you are required to report the capital gain realized on your tax return (if you are selling property in the United States, please read this article on the tax implications for Canadians selling US property and real estate).  The capital gain is the difference between the selling price and the original purchase cost.  Selling cost can be deducted from the gain to reduce it.  According to the Canada Revenue Agency’s rules, only half of the capital gain is taxable to you.  What about in cases where you make the sale but do not collect all of the payment from the seller? In this situation, you will still be required to pay the capital gains tax even though you have not collected all of the money.  The solution for a situation in which the buyer makes payments over a period of time is the usage of the capital gains reserve.

Capital Gains Reserve

This reserve allows the seller from exempting all of the capital gains on their income until they receive all of the payment from the buyer.  As long as you are a resident of Canada, you can claim the capital gains reserve.  To claim this reserve, form T2017 in schedule 3 must be completed and submitted with your personal tax return for the year of sale.  Claiming this reserve will allow the deferral of capital gains for a maximum of five years.

For example, let’s assume that you realized a capital gain of $200,000 and the buyer agrees to pay in equal yearly installments over a period of five years.  By using the capital gains reserve, you would only have to report $40,000 of capital gains in income for each year for the next five years.

If you expect your tax bracket to be higher in future years, then claiming the capital gains reserve may not be entirely beneficial.  In this case, you will pay less tax overall if you include the entire capital gain in the current year.

So Here’s the Tip:

When you sell a property for profit.  Claim the capital gains reserve to defer including the gain in your income for up to five years.  For more information on how to minimize tax on real estate sales, please read this article on tax on real estate sales in Canada.


The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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Comments 27

  1. I have two investments property as rental units. I have sold one with a closing date of September 1, 2016. The capital gains is about $60,000. How can I defer the capital gains tax?
    Thank you.

    1. Hi, Eva
      If you received all of the sales proceeds on closing, you cannot defer paying tax on the capital gain that arose on sale.

  2. My husband just sold his primary residence. We are now living in my home. We got married July 2nd, 2016. Can he maximize my interest free account of 52k as well as his, Without any CRA difficulties?

  3. Why can’t we have a 1031 tax law and allow small real estate developers to grow larger. If the GOC needs some affordable housing, the best way to get this is to have moire developers able to grow large enough to undertake this investment. As it stands now, developers are restricted in growth and simply hold their properties, retire their mortgages and collect cashflow and then retire altogether. Sad use of our investment resources. Only REITS are now capable and they are slow to respond or dis-interested.

  4. Convincing the buyers to pay in 5 installments may not be simple. It could also be risky to you as the seller. Most purchase proceeds are financed by banks and so, unless the bank gets into the act, the suggested idea is a non-starter.
    Are there financial services out there helping you to hold the proceeds, divvy them up into 5 installments and give them to you? What about a middleman in flipping the sale for a fee such as he buys it from you and sell to the buyer at the same time?


    1. There are secondary lenders that could lend to you, but keep in mind that the interest rates they charge are very high, usually 10% or more per year. It’s unlikely that a middleman will want to get involved, because he/she will have the same issue – waiting for a long period of time to collect the sales proceeds in full.

  5. I need advice on Capital gain on real estate and would like to find out if property is bought and sold under the corporation (small business) will it help to defer capital gain taxes, if amount is re-invested in another house with creating new corporation.

    1. Hi Salim,
      Capital gains from the sale of a property cannot be deferred by reinvesting the sales proceeds into another property, whether or not the property is sold by an individual person or a corporation.

  6. Hello,

    We are in exactly the same position. Sold a jointly owned family cottage, closing date October 2018. family infighting and litigation months later, we finally received our share in July 2019. During this time, we had no idea how much money we would be getting or what we could deduct (lawyers fees for litigation, real estate etc) Unfortunately, I received bad advice from our tax return fellow, and he did not file this capital gains reserve. Can this still be filed for the 2018 Tax year?

    thank you


    1. Hi William,

      If you have not received the entire sales proceeds (i.e. the buyer still owes money to you), then you can go back and amend your previous tax return to claim the capital gains reserve.

  7. Hello,
    Can I collect all the money (cost + proceeds) for selling of my rental property on sale closing date and still create a reserve for capital gain purposes or I must collect the money from the buyer on installments in one to five years. As collecting the money in mutable years have some risk.

    1. Hi Emad,
      You cannot collect all of the sales proceeds on closing AND still claim the capital gains reserve. However, if the buyer pays the purchase price in installments, you can defer capital gains tax up to 5 years.

  8. X husband and I sold cottage. I received half of the funds from the sale. The other half is with my lawyers firm. I received the first half in 2019. I will be receiving the other half when x husband signs settlement agreement, which is now taking 6 months. Can I defer?

  9. I have transferred a property to a family member and my accountant shows a tax payment of almost $40K because of Capital gains. How can i reduce the tax on capital gains?

    1. Hi Pragya,

      If you transferred the property to a family member, other than your spouse, the transfer is deemed to occur at fair market value. If the property has appreciated in value, then there will be a capital gain. You could have rolled over the property to a corporation on a tax-free basis (using Section 85 of the Income Tax Act), in exchange for fixed-value shares of the corporation. Then, new common shares could have been issued to your family member so that he/she could enjoy the future growth in the value of the property. At this stage, your best option is to make an RRSP contribution to reduce your personal tax.

  10. If I sell my property duplex, $400,000 and by another duplex with in 3 months $450,000, Do I have to pay any capital gain?
    Since I bought the identical property with in 3 months and no cash flow leftover, in that case can I deferral my capital gain.
    Thanks in advance for your support.

    1. Hi Noor,

      No, you cannot defer capital gains tax by selling your existing property and then buying another property within 3 months of the sale. Canada does not have capital gains tax deferral rules like the US does (1031 exchange).

  11. Hello Sir

    Can you defer the cap gain in Canada buy using the all the proceeds to buy another investment property ?? within 180day or sale??

  12. Let’s say the capital gains reserve is utilized on the sale of a property and proceeds are collected over 5 years. Because the annual income from a fifth of the proceeds keeps me in a lower tax bracket, do I ultimately pay less capital gain via the deferral than had I paid it all in the year of sale? Or are the annual tax payments still relative to the gain from total sale price?


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