3- Capital gains deduction

Taxpayers who realize a capital gain upon disposition of the shares of a qualified small business corporation or eligible farm property or fishing property (see Section VI) are entitled to a deduction of up to:

• $1,016,836, $508,418 of which is a taxable capital gain if the capital gain was realized between January 1 and June 24, 2024, inclusively;
• $1.25M⁶, $833,333 of which is a taxable capital gain if the capital gain was realized after June 24, 2024.

This ceiling constitutes the limit of the taxpayer’s lifetime deduction for this type of property and other properties that were until 1994 subject to a $100,000 limit.

If you own an unincorporated business and are planning to sell it, consult a tax specialist to see how you can benefit from the capital gains deduction.

Small Business Shares

A taxpayer can take advantage of the capital gains deduction on the disposition of shares of a qualified small business corporation provided certain conditions are met, including the following:

Certain restrictions may prevent a taxpayer from using the capital gains deduction (e.g., business investment losses and cumulative net investment losses). A capital gain may also trigger the AMT (see point 12 of this section).

If all the conditions are met, consider the possibility of crystallizing the deduction on shares of your business while the corporation is eligible.

Cumulative Net Investment Loss

In general, the cumulative net investment loss account represents the cumulative excess of investment expenses over investment income since 1988. Only taxable capital gains in excess of an individual’s cumulative net investment loss qualify for the deduction.

If you anticipate not being able to use your deduction due to cumulative net investment losses, consider paying yourself a dividend or charging interest on loans granted by you to your corporation.

Allowable Business Investment Loss

An allowable business investment loss is one-half of a capital loss incurred on the disposition of a share or debt of a small business corporation. Similar to a capital loss, it is deductible at two-thirds (66.67%) if it was incurred after June 24, 2024 (at 50% before that date). Unlike capital losses, an allowable business investment loss is deductible from any other source of income, not just capital gains.

Unlike net capital losses carried over to other years, business investment loss is not adjusted to take into account the capital gains inclusion rates that apply to the year in which the loss is claimed. Therefore, such a loss realized in a year where the inclusion rate was 50% can still be deducted at 50%, even if it was deducted after June 25, 2024.

This loss must be reduced by any capital gains deduction claimed in previous years. In addition, the available capital gains deduction is reduced by the business investment loss amount incurred since 1985, including the current year.

Example: An individual who realizes a capital gain of $800,000 on the sale of qualifying small business shares will only be entitled to a capital gains deduction of $600,000 if he/she claimed a business investment loss of $200,000 in a previous year.

Capital Gain – Reinvestment and Deferral of Taxation

Individuals who dispose of shares of a small business corporation are entitled to defer all or part of the capital gain on such shares to the extent the proceeds of disposition are reinvested in new common shares of an eligible small business corporation that carries on an active business. Certain conditions must be respected.

⁶ This amount will be indexed annually as of 2026.