If you have capital gains to report, the Canada Revenue Agency (CRA) taxes this income. However, if you have certain qualifying capital gains, you can qualify for a deduction. The deduction essentially erases this income from your income tax return and lowers your tax burden.
Qualifying Capital Gains
Unfortunately, only some capital gains qualify for the exemption. In order to qualify, the capital gains must have been derived from the disposition of qualified farming or fishing property (QFFP) or from the disposition of the shares of a qualified small business corporation (QSBCS).
QFFP consists of land, sea vessels, buildings or equipment, and qualified small business corporations must be Canadian corporations that do most of their business in Canada. Either you, your relative, or member of a partnership with you must have owned the capital asset for at least 24 months prior to its disposition. Additionally, you must be a resident of Canada at the time of the disposition to qualify.
The Lifetime Capital Gains Exemption (LCGE)
For 2018, if you disposed of QSBCS, you may be eligible for the $848,252 LCGE. Since you only include half of the capital gains from these properties in your taxable income, your cumulative capital gains deduction is $424,126. For example, if you sell your business for a gross capital gain of $2 million, you deduct your exemption of $848,252 to get a $1,151,748 taxable capital gain, and you add 50% ($575,874) of that to your total income for the year.
For dispositions of QFFP in 2016 to 2018, the LCGE is $1,000,000. Since only half of your capital gains are taxable, your cumulative capital gains deduction is $500,000.
Claiming the Capital Gains Exemption
To claim the capital gains exemption, first complete Schedule 3 to calculate your capital gains for the year. Then, transfer the amount from line 199 of that schedule to line 127 of your income tax return.
If your capital gains qualify for the LCGE, use form T657 to calculate your deduction. Then, note this deduction on line 254.