- The deduction is a formula under s. 110.6(2) built on $625,000, and deductions claimed in earlier years reduce what is left.
- A cumulative net investment loss balance and allowable business investment losses claimed can each shrink the deduction.
- Residence, unpaid dividends, deferred gains and sales to a non-arm's-length corporation can also reduce or block the claim, so get tax advice before you sign.
You may expect your share sale to qualify for the lifetime capital gains exemption. Even when the shares meet the qualified small business corporation (QSBC) tests, the amount you can actually deduct may be smaller than the headline figure, or nil.
This article walks through the items that can reduce or block the deduction, how the claim is made, and a checklist to run through before you sell. It explains how things generally work and is not a substitute for advice on your own numbers.
How the deduction is calculated
An individual who sells QSBC shares or qualified farm or fishing property may claim the capital gains deduction on line 25400 of the return. For 2025 and for dispositions after June 24, 2024, the exemption is $1,250,000 of capital gains, which is a maximum deduction of $625,000.
Income Tax Act s. 110.6(2) writes this as a formula built on $625,000: [$625,000 − (A + B + C + D)] × E. Any deduction already claimed in earlier years reduces what is left. You may claim any amount in a year, up to the maximum allowable amount.
The $625,000 amount is indexed to inflation for taxation years that begin after 2025 under s. 117.1(2)(c). The indexed figure for those years should be confirmed with the CRA before you rely on it.
Investment losses that shrink the deduction
Cumulative net investment loss (CNIL) is the amount by which your total investment expenses since 1987 exceed your total investment income since 1987. A CNIL balance reduces the capital gains deduction available to you. If you had investment income or expenses in any year from 1988 to 2025, you must also complete Form T936.
Allowable business investment losses (ABILs) work differently. An ABIL claimed for 2025 reduces the capital gains deduction for 2025 and future years.
- CNIL looks back over many years of investment expenses and income, so old records matter.
- An allowable business investment loss (ABIL) you claim for 2025 reduces your capital gains deduction for 2025 and for future years.
Other items that can reduce or block the claim
| Issue | Effect |
|---|---|
| Deferred gains, such as gains held back under a reserve | Do not qualify for the deduction |
| Residence | Only an individual resident in Canada throughout the year can claim it |
| Unpaid dividends | Deduction can be denied if a significant part of the gain is attributable to dividends not paid, or paid below 90% of the average annual rate of return |
| Sale to a non-arm's-length corporation | Non-share consideration above the greater of paid-up capital and ACB may be a deemed dividend that the exemption cannot shelter |
| Alternative minimum tax | A large gain sheltered by the exemption can trigger AMT, calculated on Form T691 |
On residence, s. 110.6(5) helps in some cases: an individual resident at any time in the year is deemed resident throughout it if they were also resident throughout the year before or the year after.
The s. 84.1 problem arises where a Canadian-resident individual sells shares to a corporation they do not deal with at arm's length, and the corporations become connected. There is an intergenerational exception. The deemed dividend does not apply to a sale of QSBC or family farm or fishing corporation shares to a corporation controlled by the seller's children aged 18 or older, if a joint election is filed. The conditions are detailed, with an immediate route and a gradual route, so each case needs review.
How to make the claim
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 result goes on line 25400 of your return.
Two things can limit the amount you claim. A cumulative net investment loss balance reduces the capital gains deduction available to you. Only an individual resident in Canada throughout the year can claim the deduction, but if you were resident at any time in the year, you are deemed resident throughout it if you were also resident throughout the year before or the year after. How this applies depends on your situation, so it is worth confirming with a lawyer.
Pre-sale checklist and next steps
- Confirm the shares meet the QSBC tests well before the sale date.
- Gather prior returns to find earlier deductions claimed.
- Add up investment income and expenses back to 1987 to estimate any CNIL balance.
- List any ABILs you have claimed.
- Check whether any part of the gain will be deferred or held back under a reserve.
- Confirm you will be resident in Canada for the year of sale.
- Review dividend history on the shares.
- If the buyer is a corporation you are related to, get advice on s. 84.1 before signing.
- Ask your accountant whether AMT could apply on Form T691.
Because these items interact, speak with a lawyer or accountant before you sign a sale agreement. Changes made after signing may be too late.
Frequently asked questions
Can I claim less than the maximum deduction?
Yes. Any amount may be claimed in a year, up to the maximum allowable amount. Earlier claims reduce what remains available.
What is CNIL and where is it tracked?
CNIL is the amount by which your investment expenses since 1987 exceed your investment income since 1987, and a balance reduces your deduction. Form T936 is used if you had investment income or expenses in any year from 1988 to 2025.
Does the exemption amount change after 2025?
The $625,000 amount is indexed to inflation for taxation years beginning after 2025. Confirm the current figure with the CRA before relying on it.
Can the exemption trigger alternative minimum tax?
It can. A large capital gain sheltered by the exemption can trigger AMT, which is calculated on Form T691. An accountant can estimate this before you sell.
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
- Income Tax Act, s. 84.1(1) — Justice Laws (federal)
- 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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