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Capital Gains Deduction

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Business -> Capital gains exemption / Capital gains deduction

Lifetime Capital Gains Exemption (LCGE)

There is a $750,000 ($800,000 for 2014) lifetime capital gains exemption (LCGE), which equates to a $375,000 lifetime capital gains deduction (1/2 of the $750,000 LCGE).  The deduction can be claimed against taxable capital gains on the disposal by an individual of:

bullet qualified small business corporation (SBC) shares
bullet qualified farm property, and
bullet for dispositions occurring after May 1, 2006, qualified fishing property

The maximum LCGE that can be claimed by any individual was increased from $500,000 to $750,000, effective March 19, 2007, as a result of the 2007 Federal budget.  This includes exemptions for small business corporation shares, farm property, fishing property, and any capital gains exemptions used in 1994 or earlier.  The capital gain is reported in Part 1 on Schedule 3 of the personal income tax return.  The calculation of the deduction is done on form T657.

The 2013 Federal Budget proposes to increase the LCGE amount to $800,000 for the 2014 tax year, and index the LCGE to inflation for tax years after 2014.  The new limit will be applicable to qualified property of all individuals, even if the LCGE has been previously claimed.

The rules relating to the capital gains exemption are complex, and professional advice should be obtained for anyone who is hoping to take advantage of this deduction.  Long term planning is necessary to ensure you qualify.  The following articles provide more information:

Qualified small business corporation (SBC) shares

Qualified farm property

Qualified fishing property

Cumulative net investment loss (CNIL)

When the capital gains deduction is calculated, it is reduced by the taxpayer's CNIL balance.  The CNIL balance is the amount by which the total of all investment expenses exceeds the total of all investment income for all tax years after 1987.  The CNIL can be calculated by filling in CRA's form T936 for each year after 1987.

Tax Tip:    This is complicated and can save more than $100,000 in taxes - do it right and get professional advice!

 

Revised: January 23, 2014

 

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