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.
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:
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:
Surplus stripping: We need to fix Canada's tax rules - Jul 29, 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:
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.
(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:
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.
When the capital gains deduction is calculated, it is reduced by the taxpayer's CNIL balance.
The CNIL balance is calculated as:
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:
Canada Revenue Agency (CRA) Resources
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
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