My client is selling QSBC shares this year. How does their cumulative net investment loss reduce the capital gains exemption, and can we fix it?
Cumulative net investment loss (CNIL) is your client's investment expenses minus investment income, totalled for every year since 1988. A positive balance at the end of the year of sale cuts the cumulative gains limit dollar for dollar, so it shrinks the capital gains deduction against the 2026 lifetime exemption of $1,275,000. Form T936 tracks it.
What counts as an investment expense, and what counts as investment income?
CNIL at the end of a year is the total of your client's investment expenses for that year and every year ending after 1987, minus the total of their investment income for the same years, and never less than zero laws-lois.justice.gc.ca. Both totals are lifetime running sums, so surplus investment income from earlier years still absorbs later expenses. Form T936 maps each side to T1 lines
canada.ca:
| Investment expenses (raise CNIL) | T1 line | Investment income (lowers CNIL) | T1 line |
|---|---|---|---|
| Carrying charges and interest expenses | 22100 | Taxable amount of dividends, plus interest and other investment income | 12000, 12100 |
| Net rental losses | 12600 | Net rental income, including recaptured CCA | 12600 |
| Limited or non active partnership losses (other than allowable capital losses) | 12200 | Net income from a limited or non active partnership (other than taxable capital gains) | 12200 |
| Limited partnership losses of other years after 1985 | 25100 | Other property income, such as annuity income net of the capital portion | none |
| 50% of exploration and development expenses | 22400 | 50% of income from recovering exploration and development expenses | 13000 |
| Other expenses to earn property income | none | Taxable capital gains on property that does not qualify for the exemption (Chart A) | none |
| Net capital losses of other years, up to the Chart A amount | 25300 |
Expenses incurred to earn business income stay out, and so does business income. T936 also excludes shareholder loan repayments deducted under 20(1)(j) and interest on money borrowed to pay RRSP premiums or make pension or DPSP contributions canada.ca. The interest your client deducts on a loan used to buy shares (see interest deductibility) is the usual source of a large CNIL, together with carrying charges and rental losses.
How does CNIL reduce the capital gains deduction?
For qualified small business corporation shares, subsection 110.6(2.1) caps the deduction at the least of four amounts: the remaining lifetime room, the cumulative gains limit, the annual gains limit, and the year's taxable gains from QSBC shares laws-lois.justice.gc.ca. The cumulative gains limit is every annual gains limit since 1985, minus deductions already claimed and other reductions, minus CNIL at the end of the year. So each dollar of CNIL takes a dollar off the cumulative gains limit, and when that limit is the lowest of the four, a dollar off the deduction.
The lifetime room for 2026 is $1,275,000 of gains canada.ca, a $637,500 deduction at the one half inclusion rate. How that figure is built and the QSBC tests are on the lifetime capital gains exemption 2026 and QSBC shares test pages.
Two points change the planning. CNIL is measured "at the end of a taxation year" laws-lois.justice.gc.ca, so investment income your client earns any time up to December 31 of the year of sale counts, even after the closing date. And the blocked part of the gain is not deferred: it stays taxable that year. The unused room carries forward, but the annual gains limit and the QSBC gains cap mean it only shelters eligible gains realized in a later year.
What does CNIL cost on a 2026 share sale after four years of loan interest?
Your client borrowed to build a dividend portfolio in 2023 and owns a small rental condo. They had no investment income or expenses before 2023. Their T936 history looks like this:
| Year | Investment expenses (interest, rental loss) | Investment income (taxable dividends) | CNIL at December 31 |
|---|---|---|---|
| 2023 | $15,000 | $4,000 | $11,000 |
| 2024 | $13,500 | $4,500 | $20,000 |
| 2025 | $12,000 | $5,000 | $27,000 |
| 2026, before planning | $10,000 | $3,000 | $34,000 |
In 2026 they sell QSBC shares for $400,000 with an adjusted cost base of $100,000. They have never claimed the exemption and have no other capital gains or losses.
| Step | Amount |
|---|---|
| Capital gain | $300,000 |
| Taxable capital gain at 50% | $150,000 |
| Remaining lifetime room | $637,500 |
| Cumulative gains limit ($150,000 minus $34,000 CNIL) | $116,000 |
| Deduction (least of the limits) | $116,000 |
| Taxable capital gain left on the 2026 return | $34,000 |
Now the fix. Before December 31, their corporation pays them a non eligible dividend of $29,600. The 15% gross up makes the taxable amount $34,040 canada.ca, which goes on line 12000 and into investment income. Cumulative income becomes $50,540 against $50,500 of cumulative expenses, so CNIL at the end of 2026 is zero. The cumulative gains limit rises to $150,000, the deduction covers the whole taxable gain, and $34,000 of taxable capital gain stops being taxed. The dividend is taxed in its own right, so this works best when your client was going to draw that cash from the company anyway.
Why dividends clear CNIL and salary does not
Investment income means income from property laws-lois.justice.gc.ca. A dividend is income from property, and T936 picks up the grossed up taxable amount from line 12000
canada.ca. Salary and bonus are employment income and never touch CNIL. For an owner manager with a CNIL balance and a sale coming, that's a reason to tilt the year's draw toward dividends; the wider trade off is on salary vs dividends.
Other income that lowers CNIL in the year of sale: interest your client earns on money lent to their corporation or to anyone else, net rental income, and taxable capital gains on portfolio investments or other property that doesn't qualify for the exemption. A non eligible dividend grosses up by 15% and an eligible one by 38%, so the eligible dividend clears more CNIL per cash dollar.
One amount looks like income but doesn't count. A shareholder loan included in income under subsection 15(2) is carved out of investment income laws-lois.justice.gc.ca, and T936 lists it under "do not include"
canada.ca.
Which edge cases catch accountants?
Carried forward capital losses. When your client deducts net capital losses of other years on line 25300 in a year with gains on property that doesn't qualify, T936 line 7 adds back the lesser of the Chart A amount and line 25300 as an investment expense canada.ca. The loss you used to shelter a portfolio gain can cancel the CNIL relief that gain would have given. Plan the net capital loss carryover with the sale year in mind.
Flow through shares and limited partnerships. Only 50% of exploration and development expenses enters CNIL, but limited partnership losses enter in full, including losses of other years claimed on line 25100 canada.ca. A client who bought flow through shares for the deduction can find half of every one of those claims sitting in CNIL at the sale.
Losses elsewhere in the sale year. The annual gains limit starts from the lesser of the year's net taxable capital gains on all property and the gains on qualifying property alone laws-lois.justice.gc.ca. A capital loss on a portfolio stock realized in the same year lowers that limit, separate from CNIL. An allowable business investment loss also comes off it.
Each person has their own CNIL. The definition is per individual laws-lois.justice.gc.ca, so a spouse's interest expense doesn't touch your client's balance, and each beneficiary of a family trust uses their own CNIL against their own exemption.
Where does the CNIL figure go on the return?
Part 3 of T936 carries forward two separate totals, cumulative investment expenses and cumulative investment income, and line C is the difference, entered as zero if negative. If your client claims a capital gains deduction, line C goes on line 16 of Step 2 of Form T657 canada.ca. The deduction itself is claimed on line 25400
canada.ca.
As of October 2026, the latest T936 the CRA has posted is the 2025 version, "to December 31, 2025" canada.ca. The CRA says to complete it for any year from 1988 to 2025 with investment income or expenses
canada.ca, and the form asks for it even in a year with no capital gains deduction. If no prior T936 exists, you rebuild the totals from Parts 1 and 2 for each year back to 1988
canada.ca. The T4037 guide tells owners of QSBC shares or farm and fishing property to keep a record of their investment income and expenses for that reason
canada.ca.
Sources
If CNIL blocks part of the deduction this year, can my client claim it next year?
Only against new eligible gains. The deduction is capped by the annual gains limit and the year's QSBC gains laws-lois.justice.gc.ca, so the blocked gain is taxed in the year of sale. The unused room stays available for a later sale or for a capital gains reserve brought into income.
Does my client need T936 in a year with no capital gains deduction?
Yes, if they had investment income or expenses that year. The form says to complete it even without a deduction, because the balance is cumulative and you may need it in a future year canada.ca.
Does a bonus paid before year end reduce CNIL?
No. Only income from property counts as investment income, and T936 excludes amounts that relate to business income canada.ca. Employment income isn't on the list at all. A dividend of the same cash does reduce CNIL.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.