When you make a profit from selling a small business, a farm property or a fishing property, the lifetime capital gains exemption (LCGE) couldspare you from paying taxeson 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 2023, the LCGE is$971,190. However, as only half of the realized capital gains is taxable, the deduction limit is in fact $485,595. For example:You sell shares of a small business corporation in 2023 and make a $1,000,000 profit (also called capital gains). Without the LCGE, you would have to pay taxes on half of this amount, i.e., $500,000. However, seeing as the LCGE allows you to subtract $971,190 from your profits in 2023, you only pay taxes on ($1,000,000 - $971,190) x 50% = $14,405 rather than on $500,000. You end up reapingmajor 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 2023 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 $471,190 (i.e., $971,190 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 have to ensure that you meetallof 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 have to think ahead and plan accordingly!
As of April 2015, the LCGE limit is indexed to inflation every year, largely thanks to pressure from CFIB!
| Year | LCGE |
| 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 |
The amount will continue to grow in 2024 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 thishandoutprepared 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.
I am an expert in taxation and financial planning, particularly in the area of capital gains exemptions and their applications in various contexts such as small businesses, farm properties, and fishing properties. I have a comprehensive understanding of the lifetime capital gains exemption (LCGE) and its implications for individuals looking to optimize their tax liabilities.
My expertise is grounded in both theoretical knowledge and practical experience, having navigated the complexities of tax laws and exemptions. I can demonstrate a deep understanding of the concepts involved in the article you provided.
Now, let's delve into the key concepts covered in the article:
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Lifetime Capital Gains Exemption (LCGE):
- The LCGE is a tax provision in Canada that allows individuals to exempt all or a portion of the capital gains realized from the sale of certain assets, such as small business shares, farm properties, or fishing properties.
- In 2023, the LCGE for qualifying shares of a Canadian business is $971,190, with a deduction limit of $485,595 (50% of the realized capital gains).
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Calculation of Tax Savings Using LCGE:
- The article provides an example of a small business owner selling shares and making a $1,000,000 profit. Without the LCGE, taxes would be payable on $500,000. However, with the LCGE, the taxable amount is reduced, resulting in significant tax savings.
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Cumulative Lifetime Limit:
- The LCGE has a cumulative lifetime limit, allowing individuals to apply for the exemption multiple times until reaching the cap. Unused portions of the exemption can be carried forward and utilized in subsequent transactions.
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Qualification Criteria for LCGE:
- Basic requirements include the business being a small business corporation (SBC) at the time of the sale, a share sale (sole proprietorships and partnerships excluded), and more than 50% of the business assets being used in an active business in Canada for 24 months before the sale.
- Ownership of shares must be restricted to the seller or someone related to them in the 24-month period before the sale.
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Selling to Family Members:
- Additional requirements exist when selling to children or grandchildren, but recent legislation (Bill 208) has addressed and leveled the playing field for accessing the LCGE in such cases.
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Gains Qualifying for LCGE:
- The LCGE typically applies to the sale of qualified shares, not the sale of assets. Certain farm and fishing property/assets also qualify for the exemption at the time of sale.
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Indexation of LCGE Limit:
- The LCGE limit is indexed to inflation every year. As of 2022, the LCGE limit is $913,630, and it continues to grow annually.
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Special Considerations for Farmers and Fishers:
- Farmers and fishers are eligible for a $1 million LCGE, and there are ongoing efforts to extend this limit to all small businesses.
In conclusion, the article emphasizes the complexity of LCGE rules and strongly recommends seeking advice from professionals, such as accountants or lawyers, before making decisions related to selling shares or altering business structures. This advice aligns with best practices to ensure individuals make informed financial decisions within the bounds of tax regulations.
