What is LCGE (Lifetime Capital Gains Exemption)?
The Lifetime Capital Gains Exemption allows Canadian residents to shelter up to CAD 1,250,000 of capital gains from tax on the sale of qualifying small business corporation shares, qualified farm property, or qualified fishing property. Capital gains remain at the 50% inclusion rate (the proposed 2/3 increase was cancelled in March 2025). The LCGE is reduced by the individual's cumulative net investment loss.
Current Rate (Claimed on the personal T1 return in the year of the sale)
CAD 1,250,000 lifetime limit. Capital gains inclusion rate: 50%. Effective personal tax rate on qualifying gains varies by province and income.
Example
A founder sells her CCPC shares for CAD 1,500,000 with an adjusted cost base of CAD 250,000. Capital gain: CAD 1,250,000. She claims the full LCGE of CAD 1,250,000, sheltering the entire gain from tax. The taxable capital gain is nil. Without the LCGE, 50% of CAD 1,250,000 = CAD 625,000 would be included in income and taxed at her marginal rate.
How LCGE (Lifetime Capital Gains Exemption) works in Canada
The Lifetime Capital Gains Exemption (LCGE) is the most significant tax planning opportunity available to CCPC owners. Structuring the business to maximise the likelihood of qualifying for the LCGE should be considered from the outset of a business, not just when a sale is imminent.
**Qualifying small business corporation shares (QSBCS)**
To qualify as QSBCS at the time of sale, the corporation must be a CCPC, and: at least 90% of the fair market value of the corporation's assets must be attributable to assets used in an active business carried on primarily in Canada (the 90% test), and this test must have been met throughout the 24 months immediately before the sale (the 50% test), meaning that at no time during the prior 24 months could more than 50% of the assets have been non-qualifying assets. The shareholder must also have held the shares throughout the 24 months before the sale.
**Purification**
When a CCPC has accumulated investment assets (such as retained earnings invested in portfolios), these passive assets count against the QSBCS test. A purification strategy removes passive assets from the corporation before a sale, typically by paying out a dividend or by transferring the assets to a holding company. Purification must be done carefully to avoid triggering other tax consequences.
**Cumulative net investment loss (CNIL)**
The LCGE is reduced by the individual's cumulative net investment loss account. The CNIL account accumulates excess investment expenses over investment income since 1987. A large CNIL can reduce or eliminate the LCGE available. Common CNIL generators include interest on borrowed money used for investment and certain resource expenses.
**Capital gains inclusion rate**
Capital gains in Canada are included in income at the inclusion rate. The inclusion rate has been 50% since 1990 (with a brief period at 75% from 1990 to 1999). The 2024 federal budget proposed increasing the inclusion rate to 2/3 for gains above CAD 250,000 (individuals) and all corporate gains. This proposed change was formally cancelled on 21 March 2025. The 50% inclusion rate remains in place.
**Capital gains reserve**
When a qualifying business sale involves installment payments over multiple years, the vendor can claim a capital gains reserve, spreading the capital gain over a maximum of 5 years (or 10 years for qualifying family farm/fishing transfers). The LCGE can be claimed in each year as the reserve is brought into income, allowing the full LCGE to be used even when payments are spread over time.
Related terms
A Canadian-Controlled Private Corporation is a private corporation controlled by Canadian residents. CCPCs qualify for the 9% Small Business Deduction rate on active business income, the 35% refundable SR&ED investment tax credit, and the Lifetime Capital Gains Exemption on a qualifying share sale.
The Small Business Deduction reduces the federal corporate tax rate from 15% to 9% for Canadian-Controlled Private Corporations on the first CAD 500,000 of active business income per year. The deduction is subject to reduction for associated corporations, passive investment income, and taxable capital above CAD 10 million.
The T2 is the annual corporate income tax return filed with the Canada Revenue Agency by all Canadian resident corporations and certain non-resident corporations with a taxable presence in Canada. The return is due within 6 months of the corporation's fiscal year-end. The balance of corporate tax owing is due 2 months after year-end (3 months for eligible CCPCs).
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