Lifetime Capital Gains Exemption – Is it for you?

Update, April 17, 2024: In the federal budget tabled on April 16, 2024, the government announced that the Lifetime Capital Gains Exemption limit, for sales of small business shares and farming and fishing property, will be increased to $1.25million as of June 25, 2024, and will be indexed to inflation thereafter. They also announced a higher inclusion rate of 66.7% and introduced the Canadian Entrepreneurs’ Incentive. Please see our handout for more information.  

Having said that, the capital gains inclusion rate increase to 66.7% will create many net losers, including owners of medium-sized businesses. In addition, owners of professional corporations (such as doctors), financial, insurance, food and accommodation, arts, recreation, entertainment, and personal care services firms will be excluded from accessing the new Canadian Entrepreneurs’ Incentive and will be hit with more taxes on capital gains for sales of small business shares above $2.25 million.

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 2024, the LCGE is $1,016,836. However, as only half of the realized capital gains is taxable, the deduction limit is in fact $508,418. 

For example: You sell shares of a small business corporation in 2024 and make a $1.5 million profit (also called capital gains). Without the LCGE, you would have to pay taxes on half of this amount, i.e., $750,000. However, seeing as the LCGE allows you to subtract $1,016,836 from your profits in 2024, you only pay taxes on ($1,500,000 - $1,016,836) x 50% = $241,582 rather than on $750,000. 

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 2024 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 $516,836 (i.e., $1,016,836 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 must 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 must think ahead and plan accordingly!

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

2014 $800,000
2015 $813,600
2016 $824,176
2017 $835,716
2018 $848,252
2019 $866,912
2020 $883,384
2021 $892,218
2022 $913,630
2023 $971,190

The amount will continue to grow in 2025 and every year thereafter.

Farmers and fishers are also eligible for a $1,016,836 LCGE. This amount is indexed to inflation this year and moving forward. 

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.