Lifetime Capital Gains Exemption When Selling Your Ontario Business

If you own shares in a small business corporation and plan to sell, the lifetime capital gains exemption may shelter a large part of your gain from tax. It is one of the most valuable tax rules available to Canadian business owners, and one of the easiest to lose by not checking the conditions early.

This article explains the main tests in plain language. Dollar limits are indexed and the rules have transitional wrinkles, so treat this as a map of what to ask, not a calculation of your tax.

What the exemption is and who can claim it

The exemption lets an individual deduct part of a capital gain on the sale of qualifying property. For 2025, the CRA capital gains guide states the exemption is $1,250,000, with a maximum capital gains deduction of $625,000, which is 50% of that amount. The limit is indexed to inflation using the CPI.

The increase from about $1 million to $1.25 million applied to dispositions on or after June 25, 2024. The Department of Finance has since described the limit as $1.275 million for eligible entrepreneurs, reflecting indexing after 2025. Because the figure changes, confirm the amount and the date it applies from before you plan around it.

Only individuals can claim it, other than a trust that is not a personal trust, and a corporation cannot. That is why it matters whether you sell shares yourself or your corporation sells its assets.

The tests your shares must pass

To be qualified small business corporation shares, the shares must meet a set of tests at the time of sale and over the prior two years. A share qualifies only if, at the determination time, it is a share of a small business corporation owned by you, or a related person or partnership, and throughout the 24 months before that time it was not owned by anyone else.

The 90% test is the one that surprises owners. If the company has built up cash or investments beyond what it needs, it may fail the test at the moment of sale even though it passed for the prior two years. Whether surplus assets can be dealt with before a sale depends on your facts, so talk to your accountant well in advance.

The deduction is the least of several limits

Passing the tests does not mean you can deduct the full limit. Section 110.6(2.1) sets the deduction as the least of several limits, including the cumulative gains limit, the annual gains limit and the QSBC gains amount.

If you have investment income or expenses from 1988 to 2025, you must also complete Form T936 to calculate your cumulative net investment loss, which can reduce the deduction. For a sale in the taxation year that includes June 25, 2024, there is also a transitional amount of $116,582 for dispositions on or after that date, so a 2024 sale is not simply tested against one limit. Alternative minimum tax can also complicate the benefit, so ask your accountant to run the numbers.

Planning issues that can reduce the benefit

• Selling assets instead of shares: the corporation realizes the gain, the exemption is not available to it, and you are taxed again when proceeds are paid out.
• Selling to your own holding company: section 84.1 can create a deemed dividend where you sell shares to a non-arm's-length corporation for non-share consideration or higher paid-up capital, and it reduces the adjusted cost base by prior exemption claims.
• Rollovers: section 85 allows tax-deferred transfers of eligible property to a corporation for shares, but the joint election has a filing deadline and late elections require a penalty.
• Payment over time: a reserve may spread the gain, generally over no more than five years, or ten years when qualifying shares are sold to a child resident in Canada.
• Non-compete amounts: an amount received for a restrictive covenant is generally income to the person giving it, unless a sale-related election is made so the amount is added to the seller's proceeds.

How to claim it and what to do next

You claim the exemption on Form T657, and enter the deduction on line 25400 of your personal return. If you have investment income or expenses in the relevant years, you must also complete Form T936.

• Ask your accountant to test the 90% and 50% asset tests using current values.
• Confirm who has owned the shares for the last 24 months.
• Review holding company structures before any sale discussions.
• Check your cumulative net investment loss and alternative minimum tax exposure.
• Confirm the current exemption limit and the date it applies from.
• Raise the share-versus-asset question with the buyer early.
• Keep records to support Form T657 and, if needed, Form T936.

Frequently asked questions