- The lifetime capital gains exemption is $1,250,000 of gains for 2025, a maximum deduction of $625,000, but earlier claims and other items can reduce what is left.
- A cumulative net investment loss balance reduces the deduction available, and so does an allowable business investment loss claimed for 2025.
- Deferred gains, non-residence and unpaid dividends can each block the deduction, so get tax advice before closing.
If you own shares of a small business corporation and are planning a sale, you may have heard about the $1,250,000 lifetime capital gains exemption, which is claimed on the sale of qualified small business corporation shares or qualified farm or fishing property. Even a gain covered by it is not always tax-free, because a large sheltered gain can still trigger alternative minimum tax. That is the headline number, but it is a ceiling, not a promise. Your own tax history can lower the amount you can actually use.
This article looks at what reduces the exemption, not whether your shares qualify in the first place. Knowing the common reducers before you sign a deal lets you plan the price, the timing and your tax advice.
The headline number and the formula behind it
For 2025, and for dispositions after June 24, 2024, the lifetime capital gains exemption is $1,250,000 of capital gains, which is a maximum capital gains deduction of $625,000, being 50% of $1,250,000. The deduction is claimed by an individual selling qualified small business corporation shares or qualified farm or fishing property.
The deduction is written into Income Tax Act s. 110.6(2) as a formula built on $625,000: [$625,000 − (A + B + C + D)] × E. In plain terms, you start with the full amount and subtract the things that have already used it up or reduce it.
The $625,000 amount is indexed to inflation for taxation years that begin after 2025. Because of that, the figure for a later year may differ from the 2025 number, so confirm the current amount with the CRA or your accountant before relying on it.
Earlier claims, CNIL and ABILs
Any deduction you already claimed in earlier years reduces what is left. The exemption is a lifetime amount, so a past sale of shares or farm property may have used part of it. Check your old returns and notices of assessment.
- Cumulative net investment loss (CNIL): this is the amount by which your total investment expenses since 1987 exceed your total investment income since 1987, and a CNIL balance reduces the deduction available.
- Allowable business investment losses (ABILs): an ABIL claimed for 2025 reduces the capital gains deduction for 2025 and future years.
A CNIL balance looks back at investment expenses and income since 1987, so it can be easy to overlook and is worth checking carefully. A tax professional can rebuild the balance from your filing history.
Gains and sellers who do not qualify
| Situation | Effect on the deduction |
|---|---|
| Deferred gains, such as amounts held back under a reserve | They do not qualify for the deduction |
| Not resident in Canada for the year | Only an individual resident in Canada throughout the year can claim it |
| Resident part of the year | You are deemed resident throughout the year if you were also resident throughout the year before or the year after |
| Dividends not paid, or paid at a low rate | The deduction can be denied where a significant part of the gain is attributable to that |
On the dividend rule, s. 110.6(8) applies where a significant part of the gain can reasonably be attributed to dividends not being paid on a share, or being paid at less than 90% of the average annual rate of return. Whether it applies to you depends on the facts of your company.
If part of your price is payable after year end and you plan to use a reserve, speak to an accountant about how that interacts with the deduction, since reserved amounts are treated as deferred.
How the claim is made
To claim the deduction, you complete Form T657, Calculation of Capital Gains Deduction. If you had investment income or expenses in any year from 1988 to 2025, you must also complete Form T936, the cumulative net investment loss form.
You do not have to use the whole amount. Any amount of the capital gains deduction may be claimed in a year, up to the maximum allowable amount.
Alternative minimum tax and what to do next
A large capital gain sheltered by the exemption can still trigger alternative minimum tax (AMT). The AMT calculation of adjusted taxable income changed for 2024 and later years and is done on Form T691. Ask your accountant to run this calculation before closing, so the result is not a surprise at filing time.
- Gather prior returns and notices of assessment to find earlier deductions claimed.
- List investment income and expenses since 1987 so a CNIL balance can be worked out.
- Check whether you claimed an ABIL for 2025.
- Confirm you will be resident in Canada for the whole year, or meet the deeming rule.
- Review dividend history on the shares.
- Ask for an AMT estimate on Form T691 before you sign.
Because the rules interact, get advice from a tax lawyer or accountant before closing a sale.
Frequently asked questions
Is the exemption always $1,250,000?
No. For 2025 the limit is $1,250,000 of gains, a maximum deduction of $625,000. Earlier claims, a CNIL balance and an ABIL can reduce what you can use.
Do I have to claim the full amount?
No. You can claim any amount up to the maximum allowable in a year. How much to claim is worth discussing with your accountant.
What if I move out of Canada during the year of sale?
Only an individual resident in Canada throughout the year can claim the deduction. You are deemed resident throughout the year if you were resident at some point and also resident throughout the year before or the year after.
Can I still owe tax if my gain is covered by the exemption?
Possibly. A large gain sheltered by the exemption can trigger alternative minimum tax, calculated on Form T691. An accountant can estimate this before you close.
Sources
- CRA – Line 25400 Capital gains deduction — canada.ca
- Income Tax Act, s. 110.6 — Justice Laws (federal)
- Income Tax Act, s. 117.1 — Justice Laws (federal)
- CRA Guide T4037, Capital Gains – 2025 — canada.ca
- CRA – New for 2025 for capital gains — canada.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
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