# The lifetime capital gains exemption

> How the lifetime capital gains exemption shelters gains on small business shares and farm or fishing property, what can reduce it, and how to claim it.

- Web page: https://taxnotes.ca/guides/lifetime-capital-gains-exemption/
- For: Everyone · Topic: Running a corporation
- Last reviewed: 2026-10-11

If you sell shares of your small business corporation, or farm or fishing property, some or all of the gain may be tax-free. The lifetime capital gains exemption sets how much gain you can shelter over your whole life, and you use it by claiming the capital gains deduction on your return.

## How much it covers

Under proposed changes, the exemption for 2025 is $1,250,000 of capital gains on qualifying property, and the CRA applies the same limit to sales after June 24, 2024. The CRA says indexation to inflation resumes in 2026, and its indexation table lists $1,275,000 for 2026. The [tax statistics page](https://taxnotes.ca/statistics/) shows the limit by year.

The most you can deduct is 50% of the exemption for 2025, because that's the share of a capital gain that's taxable (see [how dividends and capital gains are taxed](https://taxnotes.ca/guides/dividends-and-capital-gains/)). It's a lifetime limit: what you claim in one year reduces what's left for later. In any year, you can claim any amount up to the maximum you work out.

## Who can claim it, and on what

You must be resident in Canada throughout the year. The CRA also counts you as resident throughout the year if you lived here for part of it and for all of the year before or after. Gains made while you were a non-resident generally don't qualify.

The deduction applies to taxable capital gains from selling qualified small business corporation (QSBC) shares or qualified farm or fishing property. It also covers a reserve you bring into income from an earlier sale of that property, and such gains that a trust allocates and designates to you as a beneficiary. It can apply at death too, when a person is treated as having sold their property; see [estate planning](https://taxnotes.ca/guides/estate-planning/).

## Qualified small business corporation shares

In brief, a share is a QSBC share only if all three of the CRA's tests are met:

- **At the time of sale**, it's a share of a small business corporation: a Canadian-controlled private corporation with all or most (90% or more) of the value of its assets used mainly in an active business carried on mainly in Canada, or held as shares or debts of connected small business corporations, or a mix of the two. You, your spouse or common-law partner, or a partnership you belong to must own it.
- **Throughout the 24 months before the sale**, while you, a person related to you or a partnership you belonged to owned it, it was a share of a Canadian-controlled private corporation, and more than 50% of the value of the corporation's assets were used mainly in an active business carried on mainly in Canada, or were certain shares or debts of connected corporations, or a mix of the two.
- **Throughout the 24 months before the sale**, no one owned the share except you, a person related to you, or a partnership you belonged to. Newly issued shares are generally treated as if an unrelated person owned them just before they were issued, with some exceptions.

Assets that aren't used in the active business, and aren't qualifying shares or debts of connected corporations, don't help meet these tests, so if too much of the corporation's value is in them, the shares won't qualify. Check well before a sale, since the tests look back 24 months. [Selling or winding up your company](https://taxnotes.ca/guides/selling-or-winding-up/) covers the rest of a sale.

## Qualified farm or fishing property

This is certain property owned by you, your spouse or common-law partner, or a family farm or fishing partnership either of you has an interest in. It includes land and buildings, a fishing vessel used in a fishing business, shares of a family farm or fishing corporation, an interest in a family farm or fishing partnership, and Class 14.1 property used in farming or fishing in Canada, such as milk and egg quotas and fishing licences with no time limit.

Use tests apply too. Land, buildings and Class 14.1 property such as quotas generally must have been owned throughout the 24 months before the sale by you, your spouse or common-law partner, your children or your parents, a personal trust one of them acquired it from, or a family farm or fishing partnership one of them has an interest in. They must also pass one of two use tests:

- in at least two years while one of you owned it, it was used mainly in a farming or fishing business in Canada that one of you was actively engaged in on a regular and ongoing basis, and that person's gross income from the business was more than their income from all other sources in the year
- a family farm or fishing corporation or partnership used it for at least 24 months in a farming or fishing business in Canada, and during that time one of you was actively engaged in the business on a regular and ongoing basis

For shares of a family farm or fishing corporation or an interest in a family farm or fishing partnership, all or substantially all (generally 90% or more) of the value of its property must be used mainly in a farming or fishing business. Throughout a 24-month period before the sale, more than 50% of that value must also have been property used mainly in a farming or fishing business in Canada that you or certain family members were actively engaged in. Chapter 6 of Guide T4002 has the details.

## What can reduce your claim

Form T657 limits your deduction for the year to the least of four amounts: your annual gains limit, your cumulative gains limit, your net taxable capital gains from qualifying property for the year, and the deduction you still have available. Several things can bring those limits down.

- **Cumulative net investment loss (CNIL).** Your CNIL is the investment expenses you've deducted since 1988, such as carrying charges, interest and net rental losses, minus the investment income you've reported, such as interest, dividends and net rental income. A CNIL balance reduces your cumulative gains limit, so it can cut your deduction. You work it out on Form T936.
- **Allowable business investment losses.** This is the deductible part of a loss on shares of, or a debt owed by, a small business corporation. Claiming one reduces the capital gains deduction you can claim that year and in future years. It works the other way too: capital gains deductions claimed in earlier years can reduce a later business investment loss. See [capital losses](https://taxnotes.ca/guides/capital-losses/).
- **Losses of other years.** Net capital losses from other years that you deduct this year can also reduce your annual gains limit.

The CRA suggests that owners of QSBC shares or qualified farm or fishing property keep a record of their investment income and expenses, and complete Form T936 for any year they have either, even when they aren't claiming the deduction.

A large deduction can also matter for alternative minimum tax. Form T691, which works out minimum tax, has a line for the capital gains deduction, and the CRA says that, under proposed changes, the way adjusted taxable income is calculated for minimum tax changed for 2024 and later years. If your deduction is large, complete Form T691 to check.

## How to claim

1. Report the sale on Schedule 3, Capital Gains or Losses, with your return.
2. If you've had investment income or expenses in any year since 1988, complete Form T936 to work out your CNIL.
3. Complete Form T657, Calculation of Capital Gains Deduction, to work out the most you can claim.
4. Claim the amount you choose, up to that maximum, as the capital gains deduction on your return.

If you're spreading a gain over several years with a reserve, the deduction for each year's part is based on the year you sold the property.

## In short

- The exemption shelters gains on QSBC shares and qualified farm or fishing property up to a lifetime limit, and the most you can deduct is the taxable share of it (50% for 2025).
- You must be resident in Canada, and the property must pass ownership, asset and use tests that mostly look back 24 months.
- A CNIL balance, business investment losses and losses of other years can reduce your claim; work it out on Forms T936 and T657.

## Sources

1. [Line 25400 – Capital gains deduction](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-25400-capital-gains-deduction.html) (canada.ca)
2. [Indexation adjustment for personal income tax and benefit amounts](https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/adjustment-personal-income-tax-benefit-amounts.html) (canada.ca)
3. [Definitions for capital gains (qualified small business corporation shares, qualified farm or fishing property)](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/definitions-capital-gains.html) (canada.ca)
4. [Guide T4037, Capital Gains – 2025](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4037/capital-gains.html) (canada.ca)
5. [Guide T4002, Chapter 6 – Capital gains (qualified farm or fishing property)](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4002/t4002-9.html) (canada.ca)
6. [Form T657, Calculation of Capital Gains Deduction (2025)](https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t657/t657-25e.pdf) (canada.ca)
7. [Form T936, Calculation of Cumulative Net Investment Loss (CNIL) to December 31, 2025](https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t936/t936-25e.pdf) (canada.ca)
8. [Income Tax Folio S4-F8-C1, Business Investment Losses](https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-4-businesses/series-4-businesses-folio-8-losses/income-tax-folio-s4-f8-c1-business-investment-losses.html) (canada.ca)
9. [Form T691, Alternative Minimum Tax (2025)](https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t691/t691-25e.pdf) (canada.ca)
10. [Taxable capital gains on property, investments, and belongings (someone who died)](https://www.canada.ca/en/revenue-agency/services/tax/individuals/life-events/doing-taxes-someone-died/prepare-returns/report-income/capital-gains.html) (canada.ca)

Tax figures in this guide come from the TaxNotes.ca rates tables (https://taxnotes.ca/rates/), which cite the Canada Revenue Agency and, for Quebec, Revenu Québec.

Last reviewed: October 11, 2026

How to cite: "The lifetime capital gains exemption", TaxNotes.ca, last reviewed 2026-10-11, https://taxnotes.ca/guides/lifetime-capital-gains-exemption/. For a figure or rule, also cite the official source listed above.

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