Canadian LCGE 2025: $1.25M Exemption + CNIL Grind Explained

The Lifetime Capital Gains Exemption (LCGE) is one of the most significant tax shelters available to Canadian individuals. For dispositions in 2025 and 2026, it allows up to $1,250,000 in capital gains to be excluded from taxable income when selling Qualified Small Business Corporation (QSBC) shares, qualified farm property, or qualified fishing property. The planning catch is that two silent grind mechanisms — the Cumulative Net Investment Loss (CNIL) balance and prior lifetime usage — can reduce the effective exemption well below the headline limit.

The 2024 Budget LCGE Increase

The LCGE limit for 2024 was $1,016,836 (the indexed amount for that year). Budget 2024 proposed raising it to $1,250,000, effective 2024-06-25 — the same date as the proposed inclusion rate change.

Crucially, unlike the inclusion rate increase, the LCGE increase to $1,250,000 was not scrapped when the government abandoned the inclusion rate proposal in March 2025. The $1,250,000 LCGE applies for 2024 onward and is the limit in effect for 2025 and 2026 dispositions.

The limit is also subject to annual inflation indexing going forward, so the 2026 limit may be slightly higher than $1,250,000 — verify the CRA-published indexed limit for the year of your disposition before finalizing planning.

ITA s.110.6 Mechanics

The LCGE is claimed under ITA section 110.6 as a deduction in computing taxable income. The mechanics work as follows:

• The exemption is applied against the taxable capital gain — not the gross capital gain. Because the inclusion rate is 50%, a $1,250,000 gross gain produces a $625,000 taxable capital gain, and the LCGE deduction is claimed against the $625,000 taxable amount.
• The claim is made on Schedule 3 (Capital Gains and Losses) to report the qualifying disposition, and on Form T657 (Calculation of Capital Gains Deduction) to calculate the deductible amount after applying the CNIL and prior-usage grind.
• The deduction flows to Line 25400 (Capital Gains Deduction) of the T1 and directly reduces net income for tax bracket purposes — it is not merely a credit, so it lowers the effective rate across all income in the year.

What Is CNIL

CNIL stands for Cumulative Net Investment Loss. It is a running balance that has accumulated since 1988 and represents the excess of your investment expenses over your investment income over your lifetime.

Investment expenses that increase CNIL include:

• Interest expenses on money borrowed to earn investment income
• Rental losses (to the extent not already deducted elsewhere)
• Other carrying charges claimed on investment property

Investment income that reduces CNIL includes:

• Interest income
• Taxable dividends (grossed-up amount)
• Net rental income

A positive CNIL balance reduces your eligible capital gains deduction dollar-for-dollar. If your CNIL balance is $200,000 and your eligible capital gain is $1,250,000, you can only claim a LCGE deduction on $1,050,000 of the gain.

CNIL is calculated on Form T936 (Calculation of Cumulative Net Investment Loss), which must be filed with your T1 in any year you claim the LCGE.

How to Check Your CNIL

Your CNIL balance is tracked by the CRA based on prior-year filings. To find your current balance:

• Log into CRA My Account at canada.ca and navigate to Tax Return Summary for prior years — the CNIL balance is listed in the details if you have previously filed Form T936
• Review your prior-year T1 returns and add up investment expenses less investment income on Schedule 4 and Form T936 starting from 1988 or the year you began holding investments

For planning purposes, if you have used significant leverage to invest (margin loans, rental property mortgages treated as investment expenses) and have had years of net investment losses, you should calculate your CNIL balance before assuming the full $1,250,000 exemption will be available. A tax professional or the CRA’s My Account should be the starting point for this calculation.

Prior-Usage Tracking

The LCGE is a lifetime exemption, not an annual allowance. Any amount claimed in prior years reduces the remaining available deduction. CRA tracks cumulative LCGE usage per Social Insurance Number.

If you sold QSBC shares in 2019 and claimed $300,000 of LCGE, your remaining lifetime limit going into a 2026 sale is $1,250,000 minus $300,000, adjusted for any prior year limits that may have applied. You cannot claim more than the remaining unused balance regardless of current-year gain size.

Prior usage amounts are visible in CRA My Account under the Capital Gains Deduction summary. Review this before any transaction planning.

Interaction with Capital Gains Reserve

When a business sale involves installment payments received over multiple years (for example, an earnout or vendor take-back mortgage), ITA section 40(1)(a)(iii) allows you to spread the reported capital gain across up to 5 years using a capital gains reserve. You report a portion of the gain in each year as you receive proceeds.

This reserve can interact with the LCGE favorably: if you have a CNIL balance today but expect to reduce it through future investment income, spreading the LCGE claim over several years allows CNIL to wind down before you claim the exemption. Similarly, spreading the claim across years where your marginal rate is different can reduce overall tax even on the portions not sheltered by the LCGE.

Use the LCGE Calculator to see your effective exemption after applying the CNIL grind and tracking your prior lifetime usage.