Good afternoon,
I have come upon a reserve situation that, had I known in advance, I wouldn’t have accepted as it’s a little beyond my ability. That being said, I do completely understand the scenario and rules.
Eligible small bus shares sold 2017 - 2017 and 2018 were prepared by previous accountant. I have obtained full copies of both tax returns I just can’t seem to make sense of #s to carry forward to 2019 and beyond.
Here’s the details:
Proceeds $300K
Cap Gains $296,400
Client rec’d $100K in 2017 and $40K each year for another 5 years
2017 claimed $96,400 ($48,200 taxable CG) - reserve is $200K
2018 claimed $125,000 ($62,500 taxable CG) - reserve is $75K
Firstly, was this done correctly? My research leads me to believe that you don’t have to claim max reserve in 1st year but you can’t claim more in year 2??
I’m assuming they’re claiming reserve over 5 years, so what amounts am I claiming for 2019, 2020 and 2021??
And…what form do I start entering information on??? thought I would play around and figure it out but I don’t seem to be able to enter on any forms T657, T936, T2017 or Schedule 3 without getting red override.
I was thinking about recreating #s in a mock 2017 and just carrying forward each year…will this automatically create the numbers I need in 2019??
Based on the numbers you state the first year reserve is incorrect, the max reserve is the percentage of the proceeds still to be received times the gain. In this case 2/3 of $296,400 or $197,600. I wouldn’t lose too much sleep over that especially if it is statute barred. Just take into account what the claimed reserve was in 2017. 2018 you are getting ahead of the gain by claiming less than the maximum reserve. This could be tax planning if he is managing AMT and or OAS clawback. I would be inclined to recreate the returns to follow the reserves through. In 2017 you would enter the gain on S3 and the details of the reserve in the worksheet section of T2017.
If you complete the historical information at the bottom of the T2017 you shouldn’t have any red over-rides. Since the entire gain was 296,400 and the client has already brought 221,400 into income during the first 2 years you aren’t required to bring anything into income for 2019; meaning you could still claim a 75,000 reserve.
I do agree with @jimt the client did over-claim the reserve a bit in 2017. I think the maximum reserve for 2017 should have been 197,600 instead of 200,000.
You need to complete the area near the bottom of the T2017. You also need to complete line 66960 on that same schedule showing the reserve amount at the end of 2018.
I have attached 2 screenshots of the areas I am talking about. I have put in an amount of $50,000 as the Reserve claimed for 2019 only for demonstration purposes. You can include whatever number you want in that field. You need to change the “Claim Maximum” to “No” or else it will populate column J - Reserve Claimed for 2019 with the full 75,000 again since you technically don’t need to bring anything into income for 2019.
This is the area on the T2017 where you would enter the historical information for the reserve.
Wow, thank you so much for all that detail. Which begs my next question…what factors dictate how much to declare in each year…are tax bracket and clawbacks the only consideration? The rules read like year 4 after the disposition (the fifth year), the claim is zero? So I could do zero 2019, $75k 2020 and zero 2021? Is any combination possible now?
Yes, you are correct. Thanks!
I have amended the screenshots.
That will teach me to talk on the phone and work on tax stuff at the same time. I’m getting bad at multi-tasking.
One other thing to note: the note could be prepaid/postpaid, so despite the fact that there was a “planned payment schedule” it wouldn’t be totally unusual for a debtor to accelerate that…or postpone it with the agreement of the payee…so you also want to verify the actual payments annually.
As, at least I believe based on what you have said, this is a gain eligible for CGE, generally you would want to claim the gain as quickly as possible without running into AMT or OAS clawback. That is reduce the reserve just to the point that AMT or clawback would start. Not sure if this is the case but if you are dealing with elderly taxpayers you never know it they are going to die and screw up all you careful tax planning.
Yes, it is a gain eligible for CGE. I believe you are correct in your assumption, previous claim (I have since learned) had to do with tax bracket. OAS not a worry for the years in question. I completely appreciate your insight…it helps me to “understand”. Thanks again
Ok, so I said I understood the rules…I lied, haha. I’m so perplexed…I hope you guys love the challenge.
Here’s his scenario.
2019 - Total Income $19K, Net & Taxable $1,870
2020 - $45K, $44.6K (incl $8K CERB)
2021 - $51.5K $51K (incl $6K EI)
Here’s my thinking:
Claim full $75K in 2019 - wife’s income is too high to qualify for other gov’t benefits anyways
If we claim any CG in 2020 or 2021, it is going to cause a repayment of CERB/EI??
Firstly, Can I do that?? Claim the full $75K in 2019, or do I have to carry over the full 5 year term?
Secondly, is my logic correct?
Thirdly, if I can do the full amount in 2019 do I still have to complete forms/schedules with ZERO amounts for 2020/2021 or they don’t have to be completed at all?
If the 2019 T1 has never been filed, there should be no problem claiming the full CG in 2019. However, if you are planning to submit a T1-ADJ to remove a previously filed CG reserve, CRA may have some questions about what actually occurred, and whether the requested change is “retroactive tax planning” which is not allowed.
If the 2019 T1 is filed without a CG reserve, then you don’t need to report anything about it in 2020 or 2021 (assuming those returns haven’t been filed yet either).
CERB or EI will be affected if the actual cash was received during a month for which the CERB or EI claim was made. That is, if the taxpayer applied for CERB or EI and did not report all of their INCOME for that period (including proceeds from a sale which was legally structured with future/reserve payments), their CERB/EI claim would be fraudulent, and in addition to required repayments, they may be subject to penalties and legal consequences.
