How do you know that you are not transmitting data? The way I see that code, it will (assuming it works) transmit characters very quickly, forever, toggling the LED pin each time. It will transmit so fast that the LED will look like it is glowing constantly, not blinking. Put a delay of 1 second or so into the Tx side loop if you want to see the toggle.
PIC16F886 should have enough I/O to support ICD. Do you have a Pickit3 (or better) to do ICD?