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.
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, $883,384 in 2020, and $892,218 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.