Question

jim reynolds sold his shares of a qualified small business corporation. jim's shares had an aggregate fair market value of $500,000 at the sale date of december 31. jim's total adjusted cost base of all the shares owned is $4,000. during the year, jim also claimed a business investment loss of $10,000. he has never used any of his lifetime capital gains exemption of $913,630 or had a cumulative net investment loss balance. what is the amount of the capital gains deduction available for jim to use against his taxable income?

Answer 1

Jim Reynolds can apply the lifetime capital gains exemption and his business investment loss to his capital gains from selling shares, leaving him with a net taxable capital gain of $486,000. He can deduct 50% of this amount from his taxable income, resulting in a capital gains deduction of $243,000.

Step-by-step explanation:

Jim Reynolds sold his shares in a qualified small business corporation for a fair market value of $500,000 with an adjusted cost base of $4,000. To calculate the capital gains, we subtract the adjusted cost base from the sale amount which gives us a total capital gain of $496,000. Since Jim has never used any of his lifetime capital gains exemption, he can use the entire amount of the exemption available ($913,630) to reduce the taxable capital gain, as long as the gain does not exceed the exemption limit. However, Jim also has a $10,000 business investment loss which can be used to offset his capital gains, resulting in a net taxable capital gain of $486,000. Accordingly, the capital gains deduction that Jim can apply against this amount is half of the taxable capital gain, which is referred to as the allowable capital gains deduction. In Canada, capital gains are effectively taxed at a rate of 50%, so Jim can reduce his taxable income by $243,000, which is 50% of his net taxable capital gains.