Does Your Corporation Qualify as a Small Business for the LCGE in Ontario?

If you own shares of a private company and are thinking of selling, the lifetime capital gains exemption (LCGE) may shelter part of the gain. It applies to the sale of qualified small business corporation shares, often called QSBC shares, or of qualified farm or fishing property. This article focuses on the shares.

Whether your shares qualify depends on facts about the company's assets and on who has owned the shares and for how long. This article walks through the tests in plain language so you can spot problems early.

What the exemption is worth

An individual who sells qualified small business corporation shares, or qualified farm or fishing property, may claim the capital gains deduction on line 25400 of the return. For 2025 and for dispositions after June 24, 2024, the limit is $1,250,000 of capital gains, a maximum deduction of $625,000.

The deduction is built on a formula in section 110.6(2) of the Income Tax Act, so any deduction you claimed in earlier years reduces what is left. The $625,000 amount is indexed to inflation for taxation years that begin after 2025. Check the current indexed figure with the CRA or your accountant before relying on a number for a later year.

The three tests

A small business corporation is a Canadian-controlled private corporation (CCPC) in which 90% or more of the fair market value of the assets is used mainly in an active business carried on primarily in Canada, is shares or debts of connected small business corporations, or is a combination of these.

Why timing matters

The 90% test applies at the time of sale, while the more-than-50% test must be met throughout the 24 months before the sale. A company that holds a lot of cash or investments that are not used in the active business can fail one test even if it passes the other.

A signed purchase and sale agreement does not by itself end CCPC status when the buyer is a non-resident or public company, because a right under that kind of agreement is not counted for this purpose.

Situations that change the result

• Newly issued shares: shares issued after June 13, 1988 are deemed to have been owned by an unrelated person before issue, so the 24-month clock starts at issue. This does not apply to shares issued in exchange for other shares, for all or substantially all the assets of an active business, or as a stock dividend.
• Death: a share that would have qualified immediately before death except for the 90% requirement is still treated as qualifying if it qualified at any time in the 12 months before death.
• Unpaid dividends: the deduction can be denied where a significant part of the gain can reasonably be attributed to dividends not being paid, or being paid at less than 90% of the average annual rate of return.
• Residency: only an individual resident in Canada throughout the year can claim it, though someone resident at any time in the year is deemed resident throughout if also resident throughout the year before or the year after.
• Other reductions: a cumulative net investment loss or an allowable business investment loss claimed can reduce the deduction available. Deferred gains do not qualify.

What to do next

• List the company's assets and estimate which are used in the active business and which are not.
• Trace share ownership for the past 24 months, including any new issues, reorganizations or transfers.
• Gather past returns to see what deduction you already claimed.
• Ask your accountant about Form T657, and Form T936 if you had investment income or expenses in any year from 1988 to 2025.
• Speak to a lawyer or accountant before signing a deal, since a large exempt gain can also raise alternative minimum tax issues.

Frequently asked questions