What it covers and the limit
The CRA says you may be able to claim the deduction on taxable capital gains from selling qualified small business corporation shares, qualified farm or fishing property, or a reserve brought into income from either. Gains on other property, such as a rental building or ordinary investments, do not qualify.
For 2025 the CRA reports an LCGE of $1,250,000, described as under proposed changes, so the maximum capital gains deduction is $625,000, which is 50% of that amount. Before June 25, 2024 the limit was $1,016,813. The limit is indexed to inflation, so confirm the figure for the year of your sale.
The small business share tests
For shares, the corporation must be a small business corporation at the time of sale: a Canadian-controlled private corporation with 90% or more of the fair market value of its assets used mainly in an active business carried on primarily in Canada, or held as shares or debts of connected small business corporations. Throughout the 24 months before the sale, more than 50% of its asset value must meet a similar test, and nobody other than you or someone related to you may have owned the shares.
These tests are applied to the facts, so holding companies, passive investments and recent share issuances need review before a sale is planned. The test also looks at who owned the shares, so a holding structure can change the outcome.
An illustrative example
These figures are illustrative only. Suppose you sell qualifying shares and have a capital gain of $800,000. With a one-half inclusion rate, your taxable capital gain is $400,000. If you have enough limit available, you can claim a capital gains deduction of $400,000 on line 25400, which uses $800,000 of your lifetime limit and leaves less available for later years.
You can claim any amount up to your maximum, so you do not have to use it all at once. Because the limit is a lifetime one, earlier claims generally reduce what remains.
What to discuss with your accountant
Raise it well before any sale, ideally a couple of years ahead, because the 24-month tests depend on how the business has been held and what its assets look like. Bring share certificates, the corporate structure, recent financial statements and past tax returns showing any earlier claims.
The CRA requires Form T657 to calculate the deduction, plus Form T936 if you have investment income or expenses in any year from 1988 to 2025. Ask your accountant whether other rules, such as alternative minimum tax, might apply to the sale.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- Line 25400 – Capital gains deductionCanada Revenue Agency
- Guide T4037, Capital GainsCanada Revenue Agency
- Calculating and reporting your capital gains and lossesCanada Revenue Agency
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.