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 shares of a qualifying Canadian business in 2020, the LCGE is $883,384. However, as only half of the realized capital gains is taxable, the deduction limit is in fact $441,692.
For example:You sell shares of a small business corporation in 2020 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 $883,384 from your profits in 2020, you only pay taxes on ($900,000 - $883,384) x 50% = $8,308 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 2020 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 $383,384 (i.e., $883,384 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.
If I intend to pass the business on to my children, does this really matter?
Absolutely! In the event of your death, your shares in your corporation can be passed onto your spouse without taxation. However, if you intend to pass your shares along to your children, this would be viewed by the government as a “sale” and taxes would apply, unless you are exempt.
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.
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!
Qualifying for the LCGE is constant work!
As of April 2015, the LCGE limit is indexed to inflation every year, largely thanks to pressure from CFIB! In 2014, the LCGE limit was $800,000, and it rose to $813,600 in 2015 before climbing to $824,176 in 2016, $835,716 in 2017, $848,252 in 2018, $866,912 in 2019 and $883,384 this year. The amount will continue to grow in 2021 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.
Have any questions? Your CFIB advisor is waiting for your call.