Stock Price Reactions to the Canadian Lifetime Capital Gains Exemption

This study examines abnormal stock return around the announcement of the Lifetime Capital Gains Exemption (LCGE) in the Canadian federal tax system. The revised code, adopted May 23, 1985 provided individual taxpayers with a cumulative tax exemption for capital gains, up to a lifetime limit of $500,000. The empirical result, using TSX daily stock return data, indicate that around the announcement, especially before the announcement, abnormal stock returns are negatively associated with the interaction of dividend yields and individual shareholdings. This finding suggests that the stock market anticipated the capital gains tax change. The level of individual shareholding, which proxies for whether the marginal shareholders are individual shareholders are taken into account because the LCGE was only applied to individual shareholders