Lifetime Capital Gains Exemption

1. What is a capital gain?
2. What is the Lifetime Capital Gains Exemption (LCGE)?
3. What is the new LCGE deduction limit announced in the 2007 Budget?
4. When does the new LCGE take effect?
5. How will the LCGE be calculated for the 2007 tax year?

Q.1 What is a capital gain?

A.1 A taxpayer may have a capital gain or loss when he or she sells or is considered to have sold capital property.

Also, depending on the taxpayer's particular situation, he or she may or may not have a capital gain (or loss) when he or she disposes of personal-use property or Canadian securities.

Q.2 What is the Lifetime Capital Gains Exemption (LCGE)?

A.2 Under certain circumstances, small business owners, farmers, and fishers may be eligible for a lifetime capital gains exemption on the first $500,000 of capital gain realized on the disposition of qualifying capital property.

Q.3 What is the new LCGE deduction limit announced in the 2007 Budget?

A.3 The 2007 Budget proposes that the LCGE be increased to $750,000. However, because the inclusion rate for capital gains and capital losses is 50%, the lifetime capital gains deduction limit would be increased from $250,000 (1/2 of $500,000) to $375,000 (1/2 of $750,000).

Q.4 When does the new LCGE take effect?

A.4 The 2007 Budget proposes that the LCGE apply to dispositions of property made after March 18, 2007.

Q.5 How will the LCGE be calculated for the 2007 tax year?

A.5 The 2007 Budget proposes that an individual's capital gains deduction in respect to net taxable capital gains be determined using a three-step process:

1. Determine the individual's capital gains deduction for 2007 as if the capital gains deduction limit for 2007 remained at $250,000.
2. Determine an additional amount, not exceeding $125,000, that is the increase in the cumulative gains limit at the end of 2007 that is attributable to net taxable capital gains from dispositions made after March 18, 2007, to the extent that it exceeds the amount in step 1.
3. Add the amounts determined in steps 1 and 2.

Note: As of the 2008 tax year, the lifetime capital gains deduction limit will be determined according to the usual determination process.