Are You Eligible for the Lifetime Capital Gains Exemption in Canada?
How to Use the Lifetime Capital Gains Exemption in Canada When Selling Your Business
If you’re thinking about selling your business or stepping away from day-to-day operations in the near future, it’s worth taking a closer look at the Lifetime Capital Gains Exemption (LCGE).
For qualifying small business owners, this exemption can allow you to sell shares of your corporation and potentially eliminate over $1 million in taxable capital gains. That kind of tax savings can dramatically improve the financial outcome of a business sale, but it doesn’t happen automatically.
In this article, we’ll explain who qualifies for the Lifetime Capital Gains Exemption in Canada, how much you could save, and the planning steps required to make sure your business is set up to take full advantage of this opportunity when the time comes to sell.
What Is the Lifetime Capital Gains Exemption (LCGE)?
The Lifetime Capital Gains Exemption allows individuals in Canada to shield a portion of capital gains from tax when they sell shares of a qualifying small business corporation (QSBC). For the 2025 tax year, the exemption limit sits at $1,250,000.
This exemption applies to individual taxpayers, not corporations, and is only available on the sale of qualified shares, not assets. When the conditions are met, it can significantly reduce or even eliminate the tax liability triggered by the sale.
Access to this exemption is limited to shares that meet strict eligibility criteria, particularly those held in a Canadian-Controlled Private Corporation (CCPC) where the company meets the definition of a QSBC.
Understanding how and when the LCGE applies is key to ensuring the full benefit is available when it matters most.
Who Qualifies for the LCGE?
To take advantage of the Lifetime Capital Gains Exemption, both the individual and the corporation must meet specific criteria. These requirements focus on the length of time the shares have been held, the type of business, and the composition of its assets.
Ownership Requirement
You must have owned the shares for at least 24 months before the date of sale. This holding period rule prevents short-term ownership from qualifying and encourages long-term investment in private businesses.
Qualified Small Business Corporation (QSBC) Test
To meet the QSBC definition, the corporation must satisfy two asset-use tests:
- At the time of sale: At least 90% of the company’s assets must be actively used in a business carried on primarily in Canada.
- During the 24 months leading up to the sale: Over 50% of the assets must have been used in active business operations within Canada.
These rules ensure that the exemption only applies to businesses that have consistently engaged in operational activity, not those holding passive investments or inactive subsidiaries.
Other Considerations
Additional conditions include:
- You must be a Canadian resident throughout the tax year that you claim the deduction.
- The company must qualify as a Canadian-Controlled Private Corporation (CCPC).
Meeting these requirements can open the door to significant tax savings, but failing even one element can disqualify the entire exemption. That’s why understanding and planning around these rules is so important.
Tax Planning to Maximize the LCGE
Qualifying for the LCGE isn’t automatic. Even if a business meets the general criteria, many owners find themselves unable to claim the exemption because they didn’t plan early enough or overlooked technical requirements. If a future sale is on your radar, now is the time to prepare.
Here are the key tax planning steps to help you stay eligible and make the most of the LCGE:
1. Purify the Corporation
Over time, many private companies accumulate assets that don’t qualify as part of an active business, such as investments, excess cash, or real estate not used in operations. These passive assets can jeopardize your eligibility.
To stay within the asset-use thresholds, remove or restructure non-active assets well before a sale. This process, often referred to as “purifying” the corporation, ensures the business meets the 90% and 50% active asset tests when it counts.
2. Hold for the Required Period
The 24-month ownership rule is strict. Selling even a few days too early can eliminate access to the exemption. If you recently acquired shares or restructured your company, mark your calendar and avoid triggering a sale before the full holding period is met.
3. Structure for Multiple Exemptions
With the right structure, it may be possible for more than one person to use the LCGE on a sale, including through a family trust, provided all technical conditions are met (e.g., beneficiary eligibility, proper allocations, and compliance with income-splitting rules).
This strategy requires attention to detail and long-term planning, especially if you intend to use a family trust structure.
4. Keep Corporate Records Clean
The Canada Revenue Agency (CRA) may review the business structure and transactions surrounding the sale. Gaps in documentation, unclear financials, or questionable transactions can lead to challenges.
Make sure your financial statements, minute books, and share registers are complete and accurate. Avoid last-minute changes that could raise red flags.
5. Get a Business Valuation
A professional valuation provides evidence of the company’s fair market value, which is essential during the sale process. It also helps in determining capital gains, allocating proceeds correctly, and preparing for any potential CRA questions.
An independent valuation strengthens your position and ensures the LCGE is applied accurately.
6. Plan Early
The best results come from planning two to three years before a sale. This timeline gives you enough room to adjust the corporate structure, meet holding and asset requirements, and prepare the company for transition. Waiting until the final year often leaves little time to fix issues that could otherwise be addressed with strategic foresight.
Why Timing and Structure Matter
Waiting until the final year to prepare for a business sale can lead to costly mistakes. The rules around the LCGE are precise, and a misstep in timing or structure can result in losing access to the exemption entirely.
One of the most common mistakes occurs when business owners assume they’ll qualify by default. In reality, even minor problems, such as holding the wrong type of assets or failing to meet the minimum holding period, can disqualify the shares from exemption. These mistakes often only come to light when it’s too late to correct them.
On top of that, structuring a company for sale often involves legal, financial, and tax-related adjustments that take time to implement properly. Rushing through those steps increases the risk of non-compliance and may trigger unexpected tax consequences.
Working with a qualified advisor well before you intend to sell gives you the opportunity to review your structure, correct any red flags, and make the most of the LCGE. In many cases, two to three years of lead time is necessary to align with the exemption’s requirements and to ensure your business is ready for a smooth and tax-efficient exit.
What to do now?
The Lifetime Capital Gains Exemption gives eligible business owners in Canada the chance to sell qualifying shares and exclude over $1 million in capital gains from tax. For those approaching retirement or planning to exit their company, this can be a powerful way to retain more of what they’ve built.
But accessing this benefit requires more than meeting basic criteria. It demands early action, careful structuring, and a clear understanding of the rules. By preparing in advance, you protect your exemption and create a smoother path to sale.
If you’re thinking about selling your business within the next few years, now is the right time to take a closer look at your eligibility. Schedule a consultation to review your current structure and receive a personalized tax plan tailored to your goals.
Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
