Ads keep this website free for you.
TaxTips.ca does not research or endorse any product or service appearing in ads on this site.  Before making a major financial decision you  should consult a qualified professional.

Capital Gains Deduction TaxTips.ca
Canadian Tax and
Financial Information

If you use an ad blocker, please consider a small contribution to help keep TaxTips.ca free for everyone.

Need an accounting, tax or financial advisor? Look in our Directory.  Use above search box to easily find your topic!   Stay Connected with TaxTips.ca!
Home
What's New
Calculators
Personal Tax
Business
Sales Taxes
Financial Freedom
Financial Planning
RRSP RRIF TFSA
Real Estate
Investing
Seniors
Disabilities
Canada
Alberta
British Columbia
Manitoba
Ontario
Quebec
Saskatchewan
Atlantic Provinces
Territories
Federal Budget
Prov/Terr Budgets
Statistics etc.
Glossary
Site Map
Directory
Advertise With Us
Contact Us/About Us
Links & Resources
Business -> Capital gains exemption / Capital gains deduction

Lifetime Capital Gains Exemption (LCGE)

Income Tax Act s. 110.6

Intergenerational Transfers and Bill C-208

Bill C-208, An Act to Amend the Income Tax Act (transfer of small business or family farm or fishing corporation), received Royal Assent on June 29, 2021, thus becoming law.  The effective date of the legislation was not specified, so according to the Interpretations Act, it became law when it received Royal Assent.

bulletThe Bill allows inter-generational transfers of shares of certain small businesses to be treated the same as the sale of those shares to an arm's-length person (long overdue legislation).
bulletThe Bill has a lot of drawbacks and does not prevent surplus stripping.
bulletThe Dept. of Finance issued a press release June 30th stating that the Bill would not take effect until January 1, 2022.
bulletMr. Wayne Easter, Liberal MP who chairs the Finance Committee, called a special committee hearing for July 20, 2021 because "If you allow the cabinet or the department to take authority on their own, then you're weakening your own power as an MP and that of Parliament. And we can't have that." See the Globe and Mail article on this.
bulletIn a July 19, 2021 press release, the eve of the special hearing, the government admitted that they were wrong, that Bill C-208 is already law.  They indicated that they would bring in legislation to safeguard against unintended tax avoidance loopholes created by Bill C-208, which would apply the later of either November 1, 2021, or the date of publication of the final draft legislation.

On August 12, 2021, Finance Quebec issued Information Bulletin 2021-6 which indicates that "Quebec's tax legislation will be amended so that the easing of the Quebec integrity rule announced in 2015 and 2016 can take effect despite the coming into force of Bill C-208".

There are many articles written about this legislation and the loopholes created by it:

BDO: Bill C-208 Tax Changes for Intergenerational Transfers Now Law

PwC: Tax relief for intergenerational transfers of small businesses and family farms: But how will the new rules work?

Articles by Allan Lanthier, who is a retired partner of an international accounting firm, and has been an advisor to the Department of Finance and the Canada Revenue Agency:

Tax relief for family business transfers: A legislative fiasco - Part I - Jul 8, 2021

Tax relief for family business transfers: A legislative fiasco - Part II - Jul 9, 2021

Surplus stripping and the new, costly tax loophole for intergenerational transfers - Jul 28, 2021

Surplus stripping: We need to fix Canada's tax rules - Jul 29, 2021

The general anti-avoidance rule (GAAR) and family surplus strips - Aug 12, 2021

Tax Tip:  This is extremely complicated - get professional advice!

The Exemption / Deduction

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 deduction, claimed on line 25400 (line 254 prior to 2019) of the tax return, 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 for the federal deduction, and on form TP-726.7-V for Quebec.

Maximum Capital Gains Exemption
Capital Gains Deduction is 50% of Exemption

Date of 
Disposition
SBC Shares Farming/Fishing
Property
2022 $913,630 $1,000,000
2021 892,218 1,000,000
2020 883,384 1,000,000
2019 866,912 1,000,000
2018 848,252 1,000,000
2017 835,716 1,000,000
2016 824,176 1,000,000
2015 after Apr 20 813,600 1,000,000
2015 before Apr 21 (1) 813,600 813,600
2014 800,000 800,000
2008 - 2013 750,000 750,000

(1) Quebec increased their exemption limit for qualified farm or fishing property to $1 million effective for dispositions after December 31, 2014.

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.

The 2015 Federal Budget increased the maximum LCGE for qualified farm or fishing property dispositions on or after April 21, 2015 to the greater of:

bullet$1 million; and
bulletthe indexed Lifetime Capital Gains Exemption applicable to capital gains realized on the disposition of qualified small business corporation shares.

This means that once the LCGE exceeds $1 million for SBC shares through indexation, the LCGE for farm property and fishing property will be the same as the LCGE for SBC shares.

Quebec announced in a November 2014 bulletin that the $800,000 limit is increased for Quebec taxpayers to $1 million for dispositions after December 31, 2014, 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.  The Quebec LCGE maximum is indexed using the federal indexation factor.

Alternative Minimum Tax (AMT)

As pointed out by Denver Niklas, BBA, CPA of Baker Tilly CK LLP in his article Farmers and the Alternative Minimum Tax, the use of the capital gains exemption can trigger AMT in the year of the disposal.  This would apply not only for farming property, but also for SBC shares and fishing property.  See the article for some tax planning strategies, and be sure to plan ahead and get professional advice on this.

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 calculated as:

bullet the total of all investment expenses for all tax years after 1987
bulletless the total of all investment income for all tax years after 1987.

The CNIL can be calculated by filling in Canada Revenue Agency's (CRA) Form T936 for each year after 1987.

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

Get Professional Advice and Plan Ahead!

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

Canada Revenue Agency (CRA)  Resources

Line 25400 (line 254 prior to 2019) - Capital gains deduction

Form T657, Calculation of Capital Gains Deduction

Form T936, Calculation of Cumulative Net Investment Loss (CNIL)

Tax Tip:  This is complicated and can save more than $200,000 in taxes - do it right, plan ahead, and get professional advice!

Revised: November 18, 2021

 

Copyright © 2002 Boat Harbour Investments Ltd. All Rights Reserved.  See Reproduction of information from TaxTips.ca

Facebook  | Twitter  |  See What’s New, stay connected with TaxTips.ca by RSS or Email
The information on this site is not intended to be a substitute for professional advice.  Each person's situation differs, and a professional advisor can assist you in using the information on this web site to your best advantage. 
Please see our legal disclaimer regarding the use of information on our site, and our Privacy Policy regarding information that may be collected from visitors to our site.