When Canadian investors sell capital properties for more than they pay for it, the CRA applies a tax on 50 percent or half of the total capital gain amount. However, if you have got a capital gain amount arising from the disposition of certain types of properties, there’s a chance you’re eligible for cumulative capital gains deduction. In that case, you may be able to reduce your total taxable income.
Which gains are eligible for capital gains deduction in Canada?
You can apply capital gains deduction against your taxable capital gains included in your 2020 taxable income that arose from the following;
- Disposition of legitimate small business corporation shares
- Disposition of eligible fishing or farm property
- Any reserves brought into income in 2020 from any of the above
All capital gains from the dispositions of such properties while you were a non-resident in Canada are eligible for the capital gains deduction unless your situation meets the requirements set by the Canada Revenue Authority (CRA).
Who is eligible for capital gains tax deductions in Canada?
To be eligible to claim capital gains tax deductions in Canada, you must have been a resident of this country throughout the year 2020. The CRA may also consider you to be a resident (in 2020) if you were a Canadian resident for at least part of the year 2020 or you were a Canadian resident throughout 2019 or 2021. Keep in mind that residents of Canada include both deemed and factual.
What’s the capital gains deduction limit?
If you’re eligible for capital gains deduction, you’re entitled to somewhat cumulative lifetime capital gain exemptions only on your net gains realized on the position of qualified properties. The exemption may also apply to any reserves from such properties in a tax year. To figure out the deduction limit, check the illustration below.
Suppose you disposed of eligible small business corporation shares in 2020. In that case, you would be eligible for an $883,384 cumulative lifetime capital gain deduction. Since you can include only 50 per cent of your capital gains from an eligible property in your taxable income, the cumulative capital gain deduction is likely to be half of LCGE of about $883,384 ($441,692).
For all dispositions of eligible fishing or farm property from 2016 to 2020, the LCGE is approximately $1,000,000. Note that you can only apply 50 per cent of the capital gains tax from the qualified property in your taxable income. That means your cumulative capital gains tax deduction is half of $1,000,000 ($500,000).
The capital gains deduction limit is usually indexed to inflation using the CPI (consumer price index) data reported by Statistics Canada. Since the deduction inclusion rate in 2020 is 50 per cent, only half the capital gains from dispositions of properties is taxable. In a given year, taxpayers can claim any amount of the capital gains tax deduction they want, as long as they don’t exceed the maximum allowable amount.
How to claim a capital gains tax deduction
Suppose you are eligible to claim or apply capital gains deduction against taxable capital gains (eligible) arising from dispositions of eligible property, you’ll need to complete Schedule 3 that allows you to report dispositions and determine the net capital losses or taxable capital gains. For example, if you intend to report a reserve you claimed on your 2019 tax return or plan to claim a reserve in 2020, you must complete Form T217. Then, just enter the specific amount from line 67060 of the form on line 19200 of the Schedule 3.
In case you have investment expenses or investment income in any year from 1988 to 2020, you’ll need to complete Form T936 CNIL. Just enter the specific amount from line C of the form on line 28 of the Form T657 for 2020. If you want to calculate your total claim amount for the capital gains deduction, complete form T657.
Whenever in doubt, consult with PersonalBanker
Capital gains deduction is a complicated concept for many Canadian taxpayers. As a result, it is easy to make mistakes that could cost you money or land you into trouble with the CRA. For this reason, it is in your best interest to consult with a tax professional from PersonalBanker. We are just a phone call or single email away.