CRA finds that earnout gains from QSBCS recognized in a subsequent year benefited from the increased CGD limit in that year

In 2023, Mr. X disposed of shares which were qualified small business corporation shares (“QSBCS”) under a contract containing an earnout clause and applied the cost recovery method as set out in IT-426. In 2023, he reported a capital gain based on the minimum amount received up front and claimed the full amount as being eligible for the capital gains deduction (“CGD”). In 2025, further proceeds became determinable pursuant to the earnout clause, thereby generating recognition of a further capital gain in that year. CRA indicated that as the CGD limit had increased since 2023, Mr. X could make a 2025 claim taking that increased limit into account.

However, it noted that if reserves were claimed pursuant to s. 40(1)(a)(iii), s. 110.6(31) would prevent an individual from benefiting from a subsequent increase in the CGD limit through having deferred the recognition of part of the capital gain to a year in which the increased deduction was otherwise available.

Neal Armstrong. Summaries of 13 May 2026 External T.I. 2024-1033121E5 F under s. 110.6(2.1) and s. 110.6(31).