The Lifetime Capital Gains Exemption (LCGE) is a tax deduction on capital gains you receive from the disposal of certain types of properties.
The LCGE is usually indexed to the annual inflation, and thus, the exemption limit amount may change every year.
The lifetime capital gains exemption can be accumulated and carried over, giving you tax breaks for future capital gains on qualified property.
The deduction applies to three main types of properties: Qualified Small Business Corporation Shares, Qualified Farm Property, and Qualified Fishing Property.
You may also be able to claim the capital gains tax deduction on capital reserves resulting from installment payments from the sale of qualified small business corporation shares or qualified farm or fishing property.
Unlike the 1031 Exchange available in the US, Canadians do not have a mechanism to defer 100% of capital gains taxes from the sale of a property.
Qualified Small Business Corporation Shares
If you dispose of your shares in a qualified small business corporation, any profits you make, also referred to as capital gains, may qualify for cumulative capital gains deduction.
This means that you get to pay less taxes on your profit from the asset sale.
You have to be a Canadian resident throughout the year you realize the capital gains to qualify for the cumulative capital gains deduction.
If you were only a resident for part of the year, the Canada Revenue Agency (CRA) might consider your residency status for the previous year and the following year.
For example, suppose you were a resident of Canada for only part of 2021, but you were considered a resident for the whole of 2020 or 2022.
In that case, the CRA may consider you a resident of Canada for 2021 with regards to the capital gains deduction for 2021.
However, it is essential to note that if you have deferred your capital gains from previous years’ sale or transfer of shares in a qualified small business corporation, they will not qualify for the capital gains deduction.
To claim the capital gains deduction on your property sale, you need to fill out the Schedule 3 form to report your capital gains or losses for your qualified small business corporation shares on lines 106099 and 10700.
All your capital gains for the applicable tax year will need to be reported on line 12700 of your tax return.
After reporting your capital gains, you will need to fill out Form T657 to calculate your capital gains deduction, which will be reported on line 25400 of your tax return.
When you dispose of qualified property, you will need to report half of any capital gains on your income tax and benefit return.
Due to this, the lifetime capital gains exemption that you can claim is also reduced by half.
For example, suppose the 2021 lifetime capital gains exemption for selling Qualified Small Business Corporation Shares is $900,000.
You may be able to claim the cumulative capital gains deduction on the amount of $450,000.
Qualified Farm Property
Any capital gain you realize from the sale or transfer of qualified farm property is usually reported on lines 10999 and 11000 of Schedule 3 for reporting capital gains or losses.
Your capital gain on the disposal of your eligible farm property can qualify for capital gains deduction, allowing you to pay less tax.
The farm property could be interests or shares in a family farm partnership or corporation owned by you, your spouse, or your common-law partner.
It also includes real estate property such as land or building used for the farm partnership or corporation.
Similar to the capital gain tax deduction requirement for the Qualified Small Business Shares, you need to be a resident of Canada to claim the lifetime capital gains exemption for a qualified farm property disposal.
To claim this deduction, fill out Form T657, Calculation of Capital Gains Deduction, and report your deduction claim on your tax return.
Qualified Fishing Property
The capital gains exemption for a qualified fishing property is similar to that of qualified farm property.
The fishing property could be interests or shares in a fishing partnership or corporation owned by you, your spouse, or common-law partner and also includes property such as fishing vessels or licenses.
Capital gains from the disposal of a qualified fishing property are reported on lines 10999 and 11000 of Schedule 3.
Fill out Form T657, Calculation of Capital Gains Deduction to calculate the capital gains exemption for your qualified fishing property.
Suppose you disposed of qualified farm or fishing property (QFFP) from 2016 to 2020.
In that case, the lifetime capital gains deduction is $1,000,000, and your cumulative capital gains deduction will be $500,000, which is half of the $1,000,000 lifetime capital gains exemption.
Frequently Asked Questions
- How much tax do I pay on capital gains in Canada?
You pay capital gains tax on 50 percent (half) of your capital gains in Canada. If your capital gains are $100,000, you will be subject to a capital gains tax on $50,000.
- Is there a one-time capital gains exemption in Canada?
The capital gains exemption is cumulative and can be claimed in future years. If the capital gains tax deduction you claimed in a year is below the deduction limit for the given year, you can carry the remaining balance over and use it against your capital gains in future years.