If you’ve ever sold property or investments in Canada, you’re probably familiar with the concept of capital gains – the profit you make from selling an asset like real estate or other investments for more than you paid for it. What you might not know, however, is that under certain conditions, you may be able to reduce or eliminate the taxes you owe on those capital gains. This is where the Lifetime Capital Gains Deduction (LCGD) comes into play. The rules are complex and at Accent CPA, we will walk you through the capital gains rules and determine if you will qualify for some tax breaks!
What is the Capital Gains Deduction?
The Lifetime Capital Gains Deduction allows eligible Canadian taxpayers to exclude a portion of the capital gain from the sale of certain assets from being taxed. For individuals who qualify, the deduction can result in significant savings when selling eligible assets.
Eligible Assets for the Capital Gains Deduction
To take advantage of the LCGD, the asset you sell must meet certain criteria. The primary assets that qualify for the deduction include:
1. Qualified Small Business Corporation (QSBC) Shares
These are shares in a small business that operates in Canada. To qualify for the deduction, the business must meet strict criteria, such as meeting certain thresholds of its assets being used in active business operations in Canada.
2. Farm Property
This includes the sale of land buildings and equipment, shares in a qualifying farm corporation and an interest in a farm partnership. To qualify, the property must be primarily used for farming activities.
3. Fishing Property
Similar to farm property, fishing property includes assets such as fishing boats or equipment used in a commercial fishing business.
Who Qualifies for the Capital Gains Deduction?
Not everyone is automatically eligible for the Lifetime Capital Gains Deduction. Here are the primary conditions you must meet:
1. You Must Be a Canadian Resident
The LCGD is only available to Canadian residents. If you are a non-resident of Canada, you will not be able to claim the deduction on Canadian-sourced assets.
2. Ownership and Use Requirements
Small Business Shares: To qualify for the LCGD, you must meet the following criteria:
- Have owned the shares in the small business for at least 24 months before the sale.
- For the 24 months prior to sale, 50% of the fair market value of the assets of the corporation must used mainly in active business in Canada
- On the date of sale, 90% of the fair market of the assets of the corporation must be used in active business in Canada
Farm or Fishing Property: To qualify for the LCGD, you must meet the following criteria:
- The property must have been used primarily for farming or fishing activities.
- Additionally, you or an eligible family member must have owned and operated the property for at least 24 months before selling it.
- In many circumstances there are income-based tests that must be met, depending on the year of acquisition.
3. Cumulative Exemption Limit
Even though you may be able to claim the deduction multiple times, the total amount of capital gains you can shelter is limited by the LCGE. Once you hit the exemption limit, you won’t be able to use it for additional gains. As of January 1, 2024, the LCGE was $1,016,836 and this amount is the 2024 Federal Budget has proposed to increase the amount to $1,250,000 to account for the changes to the capital gains inclusion rate proposed changes. The limit will continue to index in future years.
Conclusion: Will You Qualify for the Capital Gains Deduction?
The Lifetime Capital Gains Deduction is a valuable tax benefit available to Canadian taxpayers who sell qualifying assets such as shares in a small business, farm property, or fishing property. However, to qualify for the LCGD, you must meet specific ownership and usage requirements, and your gains must fall within the lifetime exemption limits.
If you’re considering selling an asset that might qualify for the deduction, it’s crucial to ensure you meet all eligibility criteria and keep track of any capital gains to maximize your savings. Reach out to Accent CPA to help you navigate the intricacies of the Lifetime Capital Gains Deduction and make sure you’re maximizing your tax savings.