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2007 Budget - capital gains exempt amount

30 Apr 2007

The March 19, 2007 Federal Budget ("Budget") introduced proposals to increase the capital gains exemption from $500,000 to $750,000.

Although the Budget papers state that the increased deduction will apply to dispositions that occurred after March 19, 2007, there was some confusion that transitional rules may limit the deduction for the year 2007 to $625,000 rather than $750,000.

Effectively, the Budget paper states that for the taxation year 2007, an individual's capital gains exemption will be determined as the sum of:

The individual's pre-budget capital gains exemption for the year as if the individual's capital gains exemption limit remained at $500,000 of capital gains; and

The amount (not exceeding $125,000) by which the increase in the individual's cumulative gains limit at the end of the year that is attributable to the net taxable gains from dispositions of qualified property on or after March 19, 2007 exceeds the individual's pre-budget gains exemption.

The confusion arises due to the reference to the maximum of $125,000 increase noted above. The reference to an additional amount of $125,000 is an increase in the "cumulative gains limit". The definition of "cumulative gains limit" in subsection 110.6(1) of the Income Tax Act (Canada) (the "Act") which makes reference to "annual gains limit", which itself refers to paragraph 3(b) of the Act. Therefore the addition of $125,000 is the next taxable gains (50%). Consequently, the capital gain portion is $250,000, which increases the gross capital gain exemption from $500,000 to $750,000.

In conclusion, there are no transitional rules for dispositions of properties made after March 18, 2007. The capital gain exemption is therefore $750,000.

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