Lifetime Capital Gains Exemption

Lifetime Capital Gains Exemptions can be briefly outlined in a specific rules. The Income Tax Act discusses planning techniques that may be utilized to take advantage of these rules.  

Legislative History

Throughout history that have been many revisions to this provision since introduction. In May of 1985, Federal Budget Finance Minister Michael Wilson announced the creation of a new lifetime exemption of up to $500,000 for capital gains realized by residents of Canada. The capital gains exemption was enacted by Bill C-84 and received Royal Assent in February of 1986.

The Federal Tax Reform was implemented through Bill C-139 shortly after and received Royal Assent in September of 1988. Bill C-139 introduced substantial changes to the capital gains exemption rules. As a result, the inclusion rate for capital gains was changed from 1/2 (for years prior to 1988) to 2/3 (for 1988 and 1989) and 3/4 (for 1990 and subsequent taxation years). The capital gains exemption was capped at $100,000 for most types of property.

In February, 1994, the $100,000 general capital gains exemption was repealed, leaving in place a $500,000 “enhanced” capital gains exemption for certain types of property including shares of a qualified small business corporation and qualified farm property . In 2000, the inclusion rate was reduced to 2/3 for dispositions of property occurring after February 27, 2000, and before October 18, 2000. The inclusion rate of 1/2 is effective for dispositions of property after October 17, 2000.

The $500,000 lifetime capital gains exemption became available in 2006 for capital gains arising from dispositions of qualified fishing property after May 1, 2006 by an individual (or in certain circumstances, a personal trust).

How do you qualify? What qualifies a business owner?

This LCGE in the amount of $824,176 (for 2016) applies to capital gains from tax on dispositions of Qualified Small Business Corporation (“QSBC”) shares; another exemption of $1,000,000 (for 2016) applies to capital gains realized following the disposition of qualified farm property and qualified fishing property.

The exemption also applies to capital gains that are flowed to individuals through partnerships, trusts and certain other types of investment vehicles. The exemption is available to individual taxpayers while residents of Canada. The exemption is not available to offset capital gains realized by a corporation. Nor is it available to offset capital gains retained by a trust, i.e., capital gains that are not paid or payable in the year to a beneficiary.

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