Tax Question:
What is a schedule 13 as part of a T2 corporate tax return?
Facts:
Corporations may have capital gains related to the sale of property. Schedule 13 is used when the proceeds from the sale are not entirely received until after the taxation year end, allowing the taxpayer to defer a portion of the gain for a maximum of 5 years.
Discussion:
When capital property is disposed of, a corporation can claim a capital gains reserve for the proceeds to the extent that they have not yet been received. The corporation is required to calculate a reasonable portion of the gain as the reserve.
Generally, the capital gain reserve is calculated as:
[capital gain ÷ proceeds of disposition] x [balance receivable at the end of the taxation year]
This calculation is subject to another limitation. The reserve cannot exceed the lesser of:
- The amount calculated above; and
- [One-fifth of the total capital gain] x [4 minus the number of preceding taxation years ending after the disposition].
This means that in the first year of disposition, not more than four-fifths of the gain can be taken as a reserve. Each year the calculation must be repeated to determine the amount of the reserve. Consequently, the capital gain will be taxed over a maximum of five years.
In addition, this is calculating the maximum reserve amount that the corporation can take; it does not mean the amount they actually have to take. The corporation can claim any amount up to the maximum amount.
Raj Mehan, B.Com, M.Com, Junior Associate
Email: faqs@gilmour.ca
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