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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

The 2017 Federal government proposals to limit the LCGE will not go ahead, as per the October 16, 2017 news release.

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
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: May 20, 2021


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