Financial gains and taxes run in tandem, and capital gains make no exception. It is axiomatic to Canadians that 50% of the total capital gains will be added to your personal income for tax purposes. That said, gains from disposing qualified assets can be exempted.
Eligible Gains for Exemption
Applying the Lifetime Capital Gain Exemption, you may be eligible for the deduction if you have disposed one of the following types of property in the last tax year:
- Qualified small business corporation shares.
- Qualified farm property
- Qualified fishing property
To qualify for the deduction by selling small business corporation shares, you, your relative, or your partnership must own the shares for no less than 24 months prior to the disposition date. The shares, in addition, must be issued by a Canadian-controlled private corporation that operates mainly in Canada.
On the other hand, to qualify for the deduction by selling qualified farm properties, the property must meet the requirements of having land, buildings, capital stock, family farm partnership, and such capital property as milk or egg quotas. As for qualified fishing property, it must include land, sea vessels, and such capital property as fishing licenses.
In addition to the aforementioned requirements, you need to be a Canadian resident at the time of the disposition.
Calculating the Gains
In general, gains are calculated by taking the sale price of an asset and subtracting its Adjusted Cost Base, aka the purchase price plus any related cost incurred for the purchase. If you decide to sell an asset for less than the Fair Market Value (the estimated market price for the asset of which you intend to dispose), or simply give it to someone else, you cannot use the sale price to determine your capital gains. Hypothetically, if you give away your house to your son and accrue no financial gains from the transaction, you gain the fair market value of the house you gave away as per the CRA. You are considered obligated for the taxes the transaction ensued even when you have not made any actual income. If you give away shares to a small business corporation, however, you will still calculate your capital gains using fair market value of the shares without being taxed on the gains.
Since 2014, the CRA has increased the limit of Lifetime Capital Gains Exemption indexed to inflation. For qualified small business shares, the LCGE limit has been raised to $883,384. Keep in mind that only half of the capital gains are added to income for tax purposes, the actual amount eligible for the deduction is $441,692. For fishing and farming property, the LCGE is $1,000,000, whose actual amount eligible for deduction is $500,000.
Make the Claim
To determine the amount of exemption to which you are entitled, you need to use the Form T657 – Calculation of Capital Gains Deductions. Then, you may claim the eligible amount on line 25400 of your income tax return. This will offset the capital gains you have filled on line 12700.
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