Lifetime Capital Gains Exemption – Is it for you?

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 2023, the LCGE is $971,190. However, as only half of the realized capital gains is taxable, the deduction limit is in fact $485,595. 

For example: You sell shares of a small business corporation in 2023 and make a $1,000,000 profit (also called capital gains). Without the LCGE, you would have to pay taxes on half of this amount, i.e., $500,000. However, seeing as the LCGE allows you to subtract $971,190 from your profits in 2023, you only pay taxes on ($1,000,000 - $971,190) x 50% = $14,405 rather than on $500,000. 

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 2023 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 $471,190 (i.e., $971,190 minus $500,000) the next time you make a profit.

Do I qualify for the LCGE?

Determining whether you are qualified for the LCGE is complicated. To find out more, we recommend you speak with an accountant or lawyer.

Want to get a general idea? The basic requirements are: 

• Your company must be a small business corporation (SBC) at the time of the sale.
• It must be a share sale of your business (sole proprietorships and partnerships do not qualify).
• More than 50% of the business’s assets must have been used in an active business in Canada for 24 months prior to the sale.
• The shares must not have been owned by anyone other than you or someone related to you in the 24-month period before the sale. 

Okay, I have a corporation, I’m selling, and I want to claim the exemption… how?

First you have to ensure that you meet all of the requirements for exemption (an accountant or lawyer can help you out with this). If you meet the conditions, you can simply sell your business shares for a gain and claim the exemption in your next tax return.

I’m selling to a family member – does that change anything?

There are additional requirements to be mindful of when selling to your children or grandchildren. However, Bill 208, which passed in 2021, levelled the playing field when it comes to accessing the LCGE when selling to a family member. 

What gains qualify for the LCGE?

The LCGE usually applies to the sale of a business’s qualified shares (e.g., you sell 60% of the stock you own in your business), not to the sale of assets (e.g., your business sells a building).

Certain farm and fishing property/assets (e.g., agricultural land, boat or fishing licences) also qualify for the LCGE at the time of disposition (sale).

It is generally possible to “roll over” your business assets into a corporation, and then sell the shares of this corporation. There are conditions to be met for LCGE eligibility, some of which must be met continuously over a 24 month period. To take advantage of the LCGE, you have to think ahead and plan accordingly!

As of April 2015, the LCGE limit is indexed to inflation every year, largely thanks to pressure from CFIB! 

The amount will continue to grow in 2024 and every year thereafter.

Farmers and fishers are eligible for a $1 million LCGE, which will remain there for the time being. We are continuing to lobby the government so that the $1 million limit can apply across the board to all small businesses.

Find out more!

More information about the LCGE can be found on this handout prepared by Danielle Sideris, Senior Tax Manager, BDO Canada LLP. 

As you can see, the LCGE rules are fairly complicated! Once again, we highly recommend that you seek advice from an accountant or lawyer (or both!) prior to selling shares or changing your business structure.