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Capital Gains Deduction

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Business -> Capital gains exemption / Capital gains deduction

Lifetime Capital Gains Exemption (LCGE)

Income Tax Act s. 110.6

There is an $800,000 (for 2014, indexed after 2015, $750,000 before 2014) lifetime capital gains exemption (LCGE), which equates to a $400,000 lifetime capital gains deduction (1/2 of the $800,000 LCGE).

The 2015 LCGE limit , indexed by a factor of 1.017, is $813,600.

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 capital gains exemption is available for small business corporation shares, farm property, and fishing property, and is reduced by any capital gains exemptions used in 1994 or earlier.  Only gains that exceed cumulative net investment loss (CNIL) are eligible for the exemption. 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 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.  The 2013 Federal Budget increased the LCGE amount to $800,000 for the 2014 tax year, and it is indexed to inflation for tax years after 2014.  The new limit will be applicable to qualified property of all individuals, reduced by previous claims.

Quebec announced in a November 2014 bulletin that the $800,000 limit is increased for Quebec taxpayers to $1 million, for qualified farm property and qualified fishing property, or a combination of the two, and temporarily will not be indexed for inflation.  The LCGE for qualified small business corporation shares is $800,000 for 2014, and indexed for inflation in subsequent years.  Once the LCGE for qualified small business corporation shares exceeds $1 million through indexation, the same LCGE will then apply again for qualified farming and fishing properties.  The Quebec LCGE legislation is in the Quebec Taxation Act s. 726.6 and subsequent sections.

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:  If you have investment income or expenses, complete the T936 each year.

Get Professional Advice!

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

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

 

Revised: January 06, 2015

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