The Lifetime Capital Gains Exemption (LCGE) is an incentive created by subsection 110.6 of the Income Tax Act. It allows taxpayers the opportunity to sell certain qualified shares or property on a tax-free basis. Depending on what is being sold, taxpayers are able to receive between $800,000 to $1,000,000 of otherwise taxable capital gains, without having to pay any taxes.


Cumulative Net Investment Loss

When claiming the LCGE, taxpayers must complete form T657. In addition, taxpayers must be aware of the Cumulative Net Investment Loss (CNIL). CNIL is if taxpayers have more investment expenses then they do investment income (essentially an investment loss). To calculate CNIL, taxpayers must complete form T936.

If a taxpayer has a CNIL balance, then the gain being used for the LCGE must exceed the CNIL balance.


Section 84.1

Section 84.1 of the Income Tax Act applies to the sale of shares of a resident Canadian corporation, in a non-arm’s length transaction, to another corporation. Essentially this section works to ensure that the Lifetime Capital Gains Exemption rules are not taken advantage of by related parties.

If this section is activated by a sale, what could have been a tax-free gain, may become a taxable dividend. Meaning you could go from owing no taxes, to 30-40% of the payment to the Canadian government. Take the following example:


Lifetime Capital Gains ExemptionDr. Jones owns a dental practice, and his son, Dr. Jones Jr. also owns a dental practice. Dr. Jones wants to sell the shares of his dental practice to his son’s corporation. If Dr. Jones Jr’s dental corporation  buys his father’s practice, Dr. Jones will not be allowed to use the LCGE to receive the payment tax free. Rather, the payment will be a taxable dividend to Dr. Jones.

The reason the Canada Revenue Agency does not allow the above transaction to make use of the LCGE is simple. Dr. Jones could have given his son’s corporation a tax-free dividend, and his son could have used that money to buy the dental practice. This is known as surplus stripping and is not allowed by the Income Tax Act.  Section 84.1 works to ensure that, in certain situations, taxpayers are not allowed to get funds out of their corporations on a tax-free basis.



Tax Planning

The Lifetime Capital Gains Exemption is a large incentive that should not be ignored. Taxpayers who own corporations, or certain types of property, should ensure that their eventual sale meets the requirements so that they receive as much tax-free money as they can. However, taxpayers must also be aware of section 84.1, and similar subsections which work to stop the use of the LCGE in certain situations.


If you are tax planning for your future, and plan to make use of the Lifetime Capital Gains Exemption, or want to, give us a call today to see how we can help!


Case Law

MacDonald v. The Queen, 2012 TCC 123 – Surplus Stripping and Lifetime Capital Gains Exemption

Gwartz  v. The Queen, 2013 TCC 86 – The General Anti Avoidance Rule (GAAR) and LCGE

Emory v. The Queen, 2010 TCC 71 – Section 84.1 and Lifetime Capital Gains Exemption



This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.