Why might my capital gains exemption be less than the lifetime limit?

The deduction in s.110.6(2.1) is for an individual, other than a trust, who was resident in Canada throughout the year and disposed of a qualified small business corporation share (QSBC share). It is an amount the individual may claim, not exceeding the least of the amounts listed in that subsection. This page covers federal law only.

The least-of list

An amount in the list comes from the formula in s.110.6(2)(a). Another is the amount by which the cumulative gains limit at the end of the year exceeds the amount deducted under s.110.6(2) for the year. A third is the amount by which the annual gains limit for the year exceeds the amount deducted under s.110.6(2) for the year.

What reduces the cumulative gains limit

The cumulative gains limit is the amount by which a total exceeds another total. Where the cumulative gains limit applies, the total it must exceed includes all amounts deducted under s.110.6 in computing the individual’s taxable income for preceding taxation years. It also includes the individual’s cumulative net investment loss at the end of the year.

What reduces the annual gains limit

The annual gains limit is the amount A minus B. Under B, an item is all of the individual’s allowable business investment losses for the year, except any portion that reduced the amount otherwise deductible under s.110.61(2) or 110.62(2). Another is the amount by which net capital losses for other years, deducted under paragraph 111(1)(b) for the year, exceed a stated amount set out in the Act.

Investment loss and the forms

Cumulative net investment loss is the amount by which investment expense exceeds investment income, counting the year and preceding taxation years ending after 1987. The CRA says that if you have investment income or investment expenses in any years from 1988 to 2025, you must also complete Form T936. The CRA describes that form as a form for individuals who have investment income or investment expenses in the year, and says cumulative net investment loss may affect the allowable amount of the capital gains deduction. The CRA describes Form T657 as the form for individuals who have disposed of farm or fishing property or small business corporation shares, in the year or in a previous year. Section 110.6(6) denies a deduction in some cases of knowing or grossly negligent late filing or failure to report the gain.