Lifetime Capital Gains Exemption

I have a client who disposed of shares in a small Canadian corporation. As I understand the LCGE he should be able to claim these and not pay the taxes on them. However, in preparing the return it’s obvious that taxes are being calculated on this amount. In doing T657 it’s pulling forward an amount on line 25, which seems to be why this is canceling his exemption, since it’s slightly higher than the gain. This doesn’t make sense to me. Can someone please explain why he is not allowed to claim this LCGE? He has never claimed it before and it’s a relatively small amount (just over $11k). Thanks!

Probably has a CNIL balance that it reducing the CGE. I would check for that

Line 25 indicates an ABIL was previously claimed. ABIL’s reduce the CGE.

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Alternative Minimum Tax is often triggered when you have a large gain eligible for the capital gains deduction.

Even if it reduces the CGE by $16k, there is still far more available, and this is only an $11k gain, so it doesn’t really make sense to me.

Any ABIL that your client has claimed in the past will reduce their Capital Gains Exemption this year. I see what you are saying that there is far more available but it doesn’t work like that. Any ABIL deducted in prior years gets applied first before the client can access the CGE.

So if you had 50,000 in taxable capital gains from the sale of small business corporation shares but had 10,000 in ABIL claimed in a prior year then you can only use 40,000 of the CGE against the share sale.

In your case, if the client had a $16,000 ABIL they deducted in prior years and 11,000 in taxable capital gains then they will not be able to claim any Capital Gains Exemption.

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If you follow the form through, it does make sense. A current year CGE is not done independently of past events. A tax benefit derived from an ABIL claim has consequences down the road. The effect is most easily seen if both an ABIL and a taxable capital gain on the sake of QSBC shares occur in the same year. Client sells his shares in his business and they are QSBC shares. This generates an income inclusion. He also has an ABIL to claim in the same year. This generates a deduction from income from all sources. The CGE equals the taxable capital gain less the ABIL claimed. Net effect is a wash. In your client’s case, the two transactions were in different years, but the effect is the same.

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Well, that sucks! LOL! At least I understand it now. It seems kind of odd, considering how they taught us this in our tax class in university (I did get 98% in that class, so…). We need an advanced-personal tax class. :wink: :joy: