Capital Gains Deduction Eligibility for Proprietors

There are several additional requirements, most notably that for the shares to be QSBC shares, there are restrictions on the value of the assets that must have been used in an active business. It is often necessary to obtain an independent valuation of the assets to make sure that you meet these requirements.

The value of the Capital Gains Deduction depends on the year in which it is claimed. For 2021, individuals have a “Lifetime Capital Gains Exemption” of $892,218, but this figure increases each year. Claiming the Capital Gains Deduction, or some other tax benefits, in prior years will “draw down” this exemption and reduce the amount available going forward. The lifetime capital gains exemption effectively allows individuals to shield that amount of capital gains from taxation. Individuals draw on this exemption to claim a deduction that offsets taxable capital gains at the capital gains inclusion rate. As the capital gains inclusion rate is currently 50%, the maximum deduction that would be available would be $441,692 (effectively shielding a capital gain of $892,218 from tax). The amount that can be claimed in any given year is also limited by the “cumulative gains limit” and the “annual gains limit”, both of which are constrained by the use of other tax benefits, such as loss carryovers and business investment losses.

The same set of provisions allows business partners access to the Capital Gains Deduction regime, provided that they structure their transactions similarly to those described above.