Every Canadian resident individual is eligible for the capital gains exemption under the Income Tax Act.  The exemption allows you to realize up to $750,000 of capital gains during your lifetime, tax-free, from dispositions of certain types of property.  Since on-half of capital gains are taxable capital gains, the exemption covers up to $375,000 of taxable capital gains.  The properties that qualify for the exemption are qualified small business corporation shares (QSBC shares), and qualified farm and fishing property.

The exemption is most commonly claimed in respect of QSBC shares.  A capital gain from the disposition of a QSBC share will qualify if you held the shares for at least two years prior to the disposition, and the share met the following conditions:

First, the share must be a share of a “small business corporation” at the time of the disposition, which is a Canadian-controlled private corporation (CCPC) all or substantially all of the fair market value of the assets of which is attributable to assets that are:

  • used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it,
  • shares or indebtedness of another small business corporation that is connected with the CCPC (Generally meaning that the CCPC controls the corporation or owns more than 10% of the shares of the corporation representing the votes and value of the corporation), or
  • a combination of the above.

The Canada Revenue Agency (CRA) generally takes the view that “all or substantially all” means 90% or more.  A CCPC is basically a Canadian resident private corporation that is not controlled by non-residents or public corporations.

Additionally, in order to qualify as a QSBC share, the CCPC must have been a CCPC for at least 24 months prior to the disposition, and throughout that time more than 50% of the fair market value of its assets must have been attributable to the assets described above.  If the assets included shares or debt in another CCPC that other CCPC must meet similar asset tests during the 24-month period.

The amount of taxable capital gains that can be sheltered by the exemption is reduced to the extent of your cumulative net investment loss (CNIL) account and your allowable business investment losses (ABILs) for the year or previous years, if any.  Your CNIL account generally means your net investment losses (investment expenses in excess of investment income) from 1988 to the end of the year in which you claim the exemption.  Your ABILs generally are one-half of your capital losses from dispositions (after 1984) of certain shares or debt of small business corporations.

Example

Before 2008, you had not used any of your capital gains exemption.  In 2007, you sold shares in a small business corporation and realized a capital loss of $100,000, which resulted in an ABIL of $50,000.  In 2008, you sold some QSBC shares and realized a $75,000 taxable capital gain.

Only $25,000 of the taxable capital gain can be sheltered by the capital gains exemption in 2008.  Note, however, that the $50,000 ABIL can be used to offset income, including taxable capital gains, in 2008 or future taxation years.

As noted, the capital gains exemption also applies to capital gains from dispositions of qualified farm and fishing property.  In general terms, qualified farm property includes land used principally in the business of farming in Canada, a share of a family farm corporation, and an interest in a family farm partnership.  Qualified fishing property includes land or a fishing vessel used principally in the business of fishing in Canada, a share of a family fishing corporation, and an interest in a family fishing partnership.  Similar to the QSBC requirements, the qualified farm and fishing properties have certain ownership period and asset threshold tests that must be met.

Conclusion

Over the past 30 years Joe Truscott has been assisting his clients in using the $750,000 capital gains deduction.  If you have any questions, please do not hesitate in calling Joe Truscott at 905-528-0234 or email Joe at [email protected].