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Imagine this: You’ve built a successful business over the last decade. A buyer is interested. You get a great offer. And then, your accountant tells you that a huge chunk of that deal is going to Canada Revenue Agency (CRA).
Unless… you planned for the Lifetime Capital Gains Exemption (LCGE).
This post explains what the LCGE is, why it matters when you sell your shares, and how to make sure you’re not leaving hundreds of thousands of dollars on the table.
We’ll walk you through the rules, benefits, timing, and some smart strategies we’ve seen work in real life.
What Is the Lifetime Capital Gains Exemption?
The LCGE is a special tax rule in Canada that allows you, as an individual, to exempt up to $1,250,000 in capital gains when you sell shares of a qualified small business corporation (QSBC). Annual indexation for the $1,250,000 limit will resume in 2026.
If you’re eligible, this can reduce your taxable gain significantly, or even wipe it out entirely.
In short: It’s one of the best ways to sell your company or shares in a qualified business and keep more of the money.
Real Story (Anonymized, but True)
A founder we worked with sold her e-commerce company for $2.5M. Because she’d planned properly years in advance through tax planning techniques (which include setting up a family trust), she and her family walked away with over $2 million in tax-free capital gains.
That’s the power of planning ahead.
Do You Qualify?
Here’s a simplified checklist to help you figure it out. The rules are technically nuanced, but very generally, you and your business must meet all 3 of these criteria:
1. Qualified Small Business Corporation (QSBC)
- The company must be a Canadian-controlled private corporation (CCPC)
- More than 50% of its assets must be used in active business in Canada
2. Holding Period
- You (or a related person) must have owned the shares for at least 24 months before selling
3. Asset Test (Last 24 Months)
- At least 50% of assets must have been used in active business in Canada for the 2 years prior to sale
Watch out for:
- Excess cash, investments, or real estate sitting idle
- Shares owned by a holding company - they don’t qualify on their own
What Happens If You Don’t Plan Ahead?
You could lose the exemption entirely.
We’ve seen it happen. A business owner was set to sell for $3M, but hadn’t cleaned up passive investments or reviewed the corporate structure. Their shares no longer qualified, and they paid tax on the entire gain.
That’s a six-figure mistake.
The Tax Math: With vs. Without the LCGE
Provincial rates vary. This is a ballpark estimate.
Timeline: When Should You Start?
Best time to start? 2+ years before your sale.
Here’s what to focus on early:
- Review ownership, structure, and corporate activity
- Purify assets (reduce passive income/investments)
- Ensure shares are held personally or via trust
- Finalize valuation and shareholder agreement updates
- Confirm QSBC status and asset tests
What If My Holdco Owns the Shares?
Holding companies can’t claim the LCGE - only individuals (and some trusts) can.
But it’s not game over.
You may be able to do a reorganization to move the shares into personal hands (while deferring tax), or crystallize the gain early to lock in the exemption.
These are complex strategies, but absolutely doable with the right help.
Related: The Tax Benefits of a Holding Company for Your Business
Can I Use This for My Spouse or Kids?
Yes - with a family trust, you can spread the gain across multiple beneficiaries.
For example, if you, your spouse, and two adult children are all beneficiaries, and the trust is structured correctly, you might be able to multiply the LCGE 4x.
That’s $5M in tax-free capital gains.
Related: Why More Business Owners Are Setting Up Family Trusts Part 1
Frequently Asked Questions
What if my business has too much cash or investments?
You might not qualify. You’ll need to “purify” the company by shifting passive assets out. There are ways to do this tax-efficiently - best to start early.
Does CRA audit LCGE claims?
Sometimes. Especially if the sale is large. But if you’ve planned well and documented everything, you’ll be fine.
Can I claim the LCGE more than once?
Yes, but only until you reach the cumulative lifetime limit (indexed annually).
Can I use the LCGE for real estate?
No, unless the real estate is part of an active business (like a hotel or campground). Passive rental properties don’t qualify.
Final Thoughts: Start Before You’re Ready
We get it - selling isn’t even on your radar yet. But the earlier you plan, the more options you’ll have.
The LCGE is one of those rare tax tools that can literally change your life when used right.
If you’re a founder, owner, or investor looking at a future exit, talk to your accountant now, not when the offer hits the table.
And if you're not sure where to start? That’s what we’re here for.
Want to Make Sure You Qualify?
We help business owners, founders, and CFOs structure for success, long before the sale. Let’s talk.
