One of the more generous aspects of Canadian taxation is the Lifetime Capital Gains Exemption (LCGE). For the 2022 tax year, if you sold Qualified Small Business Corporation Shares (QSBCS), your gains may be eligible for the $913,630 exemption. However, you need to submit the appropriate form and documentation, as the exemption isn’t automatic.
There are three types of property that can give rise to the capital gains exemption:
- The first is the sale of Qualified Small Business Corporation shares. These are shares in a private company that operates an active business and is owned, in the majority, by Canadians. You or someone related to you must have owned the shares for at least 24 months. Keep in mind that shares of publicly listed companies or mutual funds are not eligible.
- The second qualifying property is Qualified Farm Property. This property type includes buildings, land, and milk and egg quotas that are used in a farming enterprise. If the farm is operated through a company, the shares of that company also qualify.
- Finally, the third type of property that qualifies for the exemption is Qualified Fishing Property, which includes real estate, fishing vessels, and fishing licenses. Here also, if the fishing business is operated through a company, the shares of the company qualify for the exemption.
Amount of Exemption
Qualified Small Business Corporation Shares
For 2022, the exemption for Qualified Small Business Corporation shares was $913,630 but this amount is indexed annually to match the official rate of inflation as published by Statistics Canada.
The amount of the exemption is based on the gross capital gain that you make on the sale. However, since only 50 percent of any capital gain is taxable in Canada, the actual amount of the exemption will be $456,815 of taxable capital gain.
The exemption is a lifetime cumulative exemption. This means that you can claim any part of it at any time in your life if you dispose of qualifying property. You do not have to claim the entire amount at once. For example, if you sold shares of a small company, say, two years ago and claimed $100,000 of exemption, you still have $700,000 available to claim.
Qualified Farm and Fishing Property
If you owned a property used in a farming or fishing business for over two years before you sell it, and continue to use it regularly, you might be able to use your capital gains exemption against the sale. However, the income earned from your farming or fishing business must be greater than any income that you earned from other sources.
The exemption for Qualified Farm and Fishing Property is the same as for Qualified Small Business Corporation shares, but there’s an additional exemption amount for qualified farm or fishing property. In 2022 this is $86,370, but that amount decreases each year. The additional deduction amount for Qualified Farm and Fishing Property is $43,185 since 50% of the capital gain is taxable.
Capital Gains Deduction in Quebec
Quebec also allows capital gains deductions on resource property, which can be completed using form Tp-726.20.2-V.
Claiming the Exemption
If you disposed of qualifying property during the year and want to claim your exemption, you will need to fill out Form T-657, Calculation Of Capital Gains Exemption. The capital gain deduction will appear on line 25400.
To do so, you will need to know your:
- Proceeds of Disposition — The proceeds of disposition is the price you sold the property for, plus any fees associated with the sale.
- Adjusted Cost Base — The adjusted cost base is the price you paid for it plus any capital improvements that you made.
You will also need to know what portion, if any, of the exemption you may have used in the past. If you don’t know this information, you can contact the CRA and they will be able to provide this information. It can also be found on your CRA’s My Account online.
References & Resources
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