When you make a profit from selling a small business, a farm property or a fishing property, the lifetime capital gains exemption (LCGE) could spare you from paying taxes on all or part of the profit you’ve earned. For many small business owners, it’s a tool to help them save for retirement or invest more in another small business.
If you sell qualifying shares of a Canadian business in 2022, the LCGE is $913,630. However, as only half of the realized capital gains is taxable, the deduction limit is in fact $456,815.
For example: You sell shares of a small business corporation in 2022 and make a $950,000 profit (also called capital gains). Without the LCGE, you would have to pay taxes on half of this amount, i.e., $475,000. However, seeing as the LCGE allows you to subtract $913,630 from your profits in 2022, you only pay taxes on ($950,000 - $913,630) x 50% = $18,185 rather than on $475,000.
You end up reaping major tax savings!
The LCGE has a cumulative lifetime limit, so you can apply for the exemption multiple times, until you reach the cap.
For example: You sell shares of a small business in 2022 and turn a profit of $500,000. You only use $500,000 of the LCGE at that time, but because the LCGE is cumulative, you can apply the remaining $413,630 (i.e., $913,630 minus $500,000) the next time you make a profit.