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 2021, the LCGE is $892,218. However, as only half of the realized capital gains is taxable, the deduction limit is in fact $446,109.
For example: You sell shares of a small business corporation in 2021 and make a $900,000 profit (also called capital gains). Without the LCGE, you would have to pay taxes on half of this amount, i.e., $450,000. However, seeing as the LCGE allows you to subtract $892,218 from your profits in 2021, you only pay taxes on ($900,000 - $892,218) x 50% = $3891 rather than on $450,000.
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 2021 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 $392,218 (i.e., $892,218 minus $500,000) the next time you make a profit.