Lifetime Capital Gains Exemption (LCGE): What You Need to Know

What is LCGE?

The Lifetime Capital Gains Exemption (LCGE) allows small-business owners and their families to reduce or eliminate taxes on capital gains from selling business shares, farm property, or fishing property.

Key Details

Starting January 1, 2024, LCGE limits for qualified small business corporation shares (QSBCS) and qualified farm or fishing property (QFFP) will align:

$1,016,836 for dispositions before June 25, 2024.

$1.25 million for dispositions on or after June 25, 2024.

Eligible Shares or Property

Shares of a small business corporation:

Must be owned by you or a related person for at least 24 months before the sale.

The business must qualify as an active business corporation; investment corporations are ineligible.

Qualified farms or fisheries:

Includes shares, land, buildings, fishing boats, or quotas (e.g., milk, eggs, or fishing licenses).

Ownership by you or your spouse in a family farm or fishing corporation also qualifies.

Important Notes

Form T2048 vs. T657: If you claim a capital gains deduction on Form T2048 for a qualifying business transfer (QBT), you cannot use the same deduction on Form T657. However, Form T657 can be used for other eligible scenarios, provided the combined deductions do not exceed the total taxable capital gains.

What You Need to Calculate the Capital Gains Exemption

Before calculating the maximum exemption amount, consider the following:

Allowable Business Investment Losses (ABILs): These reduce the exemption.

Cumulative Net Investment Loss (CNIL): Investment expenses exceeding income since 1988 reduce the exemption.

Previously claimed capital gains deductions: These lower the available exemption.

Net capital losses: Prior-year claims reduce the exemption.

Proceeds of disposition.

Adjusted cost base of the shares.

Additional Tips

If you have net capital losses carried forward from previous years, prioritize claiming the capital gains deduction and carry forward losses to offset future gains.

Quebec residents can claim capital gains deductions on resource property using Form TP-726.20.2-V.

Example

John sold shares on March 31st and realized a capital gain of $1,200,000. Previously, he claimed a net capital loss of $250,000 and an ABIL of $50,000, and his CNIL balance is $10,000.

Calculating the Capital Gains Exemption

The maximum Lifetime Capital Gains Exemption (LCGE) is the least of the following:

Annual Gain Limit: Capital Gain ÷ 2 = 1,200,000 ÷ 2 = 600,000

Cumulative Gains Limit: Net Capital Loss + ABIL + CNIL = 250,000 + 50,000 + 10,000 = 310,000

Maximum Available Capital Gains Deduction: LCGE limit ÷ 2 = 1,016,836 ÷ 2 = 508,418

John’s T1 General will show $600,000 on Line 12700 as his capital gain. He will report $310,000 on Line 25400 as his capital gains deduction.