What is the lifetime capital gains exemption for 2026, and how much can my client deduct?
For 2026, the lifetime capital gains exemption is $1,275,000, so the maximum capital gains deduction is $637,500 at the 50% inclusion rate. It is the $1.25 million limit set for dispositions after June 24, 2024, indexed by 2.0%. It covers qualified small business corporation shares and qualified farm or fishing property, claimed on Form T657.
The 2026 limit and where it comes from
Finance Canada's September 15, 2026 release lists the increase of the lifetime capital gains exemption to $1.275 million among measures already taken canada.ca. That's the $1,250,000 limit indexed for the first time since the 2024 increase.
The law backs the number. Paragraph 110.6(2)(a) of the Income Tax Act now sets the deduction at $625,000, half of $1,250,000 laws-lois.justice.gc.ca. Paragraph 117.1(2)(c) indexes that $625,000 for a taxation year that begins after 2025
laws-lois.justice.gc.ca. The federal indexing factor for 2026 is 2.0%
canada.ca, and $625,000 times 1.02 is $637,500, which is half of $1,275,000.
Budget 2025 confirmed the $1.25 million limit would stay, and said indexation would resume in 2026 canada.ca. As of October 2026, the CRA hasn't posted a 2026 version of Form T657: the latest on its form page is 2025
canada.ca. Expect the 2026 form to show $637,500 when it comes out for filing season.
LCGE by year
The CRA's line 25400 page lists the maximum deduction for each year canada.ca. The exemption is twice the deduction because half of a capital gain is taxable. 2024 has two limits, split at June 25, 2024.
| Year | Lifetime exemption | Maximum deduction |
|---|---|---|
| 2026 | $1,275,000 | $637,500 |
| 2025 | $1,250,000 | $625,000 |
| 2024, dispositions after June 24 | $1,250,000 | $625,000 |
| 2024, dispositions before June 25 | $1,016,836 | $508,418 |
| 2023 | $971,190 | $485,595 |
| 2022 | $913,630 | $456,815 |
| 2021 | $892,218 | $446,109 |
| 2020 | $883,384 | $441,692 |
| 2019 | $866,912 | $433,456 |
The limit is lifetime and cumulative. Every deduction your client claimed in earlier years comes off the room, and QSBC shares and farm or fishing property draw on the same single limit. For 2024, subsection 110.6(2.2) gave an extra deduction of up to $116,582 on qualifying dispositions on or after June 25, 2024, the gap between $508,418 and $625,000 laws-lois.justice.gc.ca. Your client must be resident in Canada throughout the year, or for part of it and throughout the year before or after, to claim
canada.ca.
Which property qualifies
A qualified small business corporation share has to pass three tests laws-lois.justice.gc.ca:
| Test | When | Rule |
|---|---|---|
| Small business corporation | At the time of sale | A CCPC with 90% or more of the fair market value of its assets used mainly in an active business carried on primarily in Canada, or in shares or debt of connected small business corporations |
| Holding period | The 24 months before the sale | Nobody other than your client or a related person or partnership owned the share |
| Asset test | Throughout those 24 months | More than 50% of the fair market value of the corporation's assets was active business assets (or qualifying connected shares and debt) |
The 90% figure is in the CRA's small business corporation definition canada.ca. Holding structures make the 50% test stricter: where a connected corporation fails to have all or substantially all of its value in qualifying assets for part of the period, paragraph (d) of the definition reads the 50% test as all or substantially all for that period.
Qualified farm or fishing property is real property or a fishing vessel used in a farming or fishing business, shares of a family farm or fishing corporation, an interest in a family farm or fishing partnership, and Class 14.1 property used in that business. It has its own use tests in the same definition.
Worked example: a 2026 share sale with CNIL
Your client sells QSBC shares in 2026 for $1,500,000. The adjusted cost base is $100,000, they have never claimed the exemption, and they have no capital losses. Over the years their investment loan interest has exceeded their investment income, leaving a cumulative net investment loss (CNIL) of $80,000 at the end of 2026.
| Step | Amount |
|---|---|
| Capital gain ($1,500,000 minus $100,000) | $1,400,000 |
| Taxable capital gain at 50% | $700,000 |
| 2026 maximum deduction | $637,500 |
| Cumulative gains limit ($700,000 minus $80,000 CNIL) | $620,000 |
| Deduction claimed (lowest of the limits) | $620,000 |
| Taxable capital gain left on the return | $80,000 |
| Exemption room left for later years ($637,500 minus $620,000) | $17,500 of deduction |
Without the CNIL, the claim would have been the full $637,500 and only $62,500 would have stayed taxable. The CNIL cost your client $17,500 of deduction this year, because the cumulative gains limit subtracts it directly laws-lois.justice.gc.ca. Pull the CNIL balance from Form T936 before the sale closes
canada.ca, and consider a dividend before year end to add investment income, which for CNIL includes all income from property
laws-lois.justice.gc.ca.
CNIL, ABILs and AMT: what shrinks the claim
CNIL is investment expenses (interest and carrying charges, rental losses, limited partnership losses, half of certain resource deductions) minus investment income, totalled for every year after 1987 laws-lois.justice.gc.ca. A positive balance comes straight off the cumulative gains limit.
Allowable business investment losses cut both ways. Any ABIL your client claims reduces the capital gains deduction for that year and future years canada.ca. Going the other way, subsection 39(9) reduces a later business investment loss by earlier capital gains deductions, and the reduced part is treated as a capital loss
laws-lois.justice.gc.ca.
The exemption doesn't shelter the gain from the alternative minimum tax. For AMT, paragraph 127.52(1)(d) includes 100% of the gain and paragraph 127.52(1)(h) allows 7/5 of the section 110.6 deduction laws-lois.justice.gc.ca. In the example, that's $1,400,000 minus $868,000 (7/5 of $620,000), or $532,000 of AMT base from the sale against $80,000 of regular taxable gain. A fully sheltered gain still leaves 30% of it in the AMT base, so run Form T691 for any large claim.
Purification and the incentive that never arrived
If cash or portfolio investments push the corporation under 90% at the sale or under 50% during the 24 months, you purify by moving those assets out before the test dates, often with a dividend to a holding company. Watch subsection 55(2): an intercorporate dividend above safe income can be recharacterized as a capital gain laws-lois.justice.gc.ca. Purify early, because the 50% test looks back over the full 24 months.
The Canadian Entrepreneurs' Incentive from Budget 2024 (a one third inclusion rate on up to $2 million of gains) isn't coming. Budget 2025 confirmed the government won't proceed with it, or with the inclusion rate increase it was tied to canada.ca. For 2026, the LCGE is the only shelter of this kind, and the inclusion rate on the rest of the gain is still one half (see capital gains inclusion rate 2026).
Sources
Does the $1,275,000 apply to a sale made in 2025?
No. A 2025 disposition uses the 2025 limit of $1,250,000, a $625,000 deduction canada.ca. Indexation only applies to taxation years that begin after 2025.
Can a reserve on a 2026 sale use the exemption in later years?
Yes, if the original gain came from qualifying property. The CRA says the deduction you can claim on a reserve brought into income is based on the year the property was disposed of canada.ca.
Can my client defer the gain and still claim the exemption on it?
No. A gain deferred under the small business share rollover doesn't qualify for the capital gains deduction on line 25400 canada.ca.
Which forms do I file?
Form T657 calculates the deduction, which goes on line 25400 of the T1. Add Form T936 if your client had investment income or expenses in any year from 1988 on canada.ca.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.