Using the Lifetime Capital Gains Exemption on a Share Sale

If you own a small business through a corporation, the way the deal is structured can change your tax result a great deal. One of the biggest reasons owners prefer to sell shares rather than assets is the lifetime capital gains exemption, often shortened to LCGE.

This article explains in plain words who can use the exemption, which tests the shares must meet, and what can quietly reduce it. It is general information, not advice. The tests are technical, so the details of your own corporation matter.

Why a share sale matters for the exemption

The LCGE is a deduction for individuals who are Canadian residents. It applies to gains on qualified small business corporation shares, qualified farm or fishing property, or a trust's allocation of those gains.

A corporation that sells its own assets cannot claim it. That is the core reason the share-versus-asset question comes up. If your corporation sells the assets, the gain is the corporation's, and the exemption is not available to the corporation. If you sell your shares and they qualify, you may be able to claim it personally.

Buyers often prefer to buy assets, so this is usually a point of negotiation. Price, risk and tax all pull in different directions, and a lawyer and accountant should look at the whole picture before you agree to a structure.

How much is the exemption and how is it claimed?

CRA states the LCGE is $1,250,000 for 2025 dispositions, which gives a maximum capital gains deduction of $625,000, or 50%. CRA labels this figure as being under proposed changes, and it is indexed to inflation. Because of that label, confirm the in-force amount for the year you sell before relying on any number.

The limit has changed recently. For 2024, it was $1,016,813 (a $508,418 deduction) for dispositions before June 25, 2024, and $1,250,000 (a $625,000 deduction) for dispositions after June 24, 2024. The date of your sale can therefore matter.

The deduction is calculated on Form T657 and claimed on line 25400 of the T1 return. You may claim any amount up to your maximum. If you had investment income or expenses in any year from 1988 to 2025, you must also complete Form T936, the cumulative net investment loss form, which can reduce the deduction available.

The tests your shares must pass

Not every share of a private corporation qualifies. A share must be a qualified small business corporation share, and several tests apply at different points in time. The table summarizes them in plain words.

Notice that the asset tests are different. The 50% test applies over the prior 24 months, while the 90% test is stricter and applies at the time of sale. Both are required, so a corporation holding a lot of cash or investments at closing can cause trouble even if the business is genuinely active.

Special rules and common traps

• Newly issued shares: shares newly issued by a corporation are treated as owned by an unrelated person before issue, so the 24-month holding period can run from issuance only in the circumstances the rule allows.
• Partnerships and trusts: partnerships and personal trusts are deemed related to their members and beneficiaries for the related-person test.
• Death: if a share was a qualifying share at any time in the 12 months before the holder's death, it can still qualify.
• Low returns: the deduction can be denied on part of a gain if the share's dividends or return were less than 90% of the average annual rate of return.
• Proposed rules: a qualifying business transfer or cooperative conversion, if the proposed rules are enacted, may allow a deduction on line 25395, and CRA says such claims come before any line 25400 claim for the same disposition.

Holding companies and layered corporate structures bring additional rules about connected corporations. Whether your structure passes depends on the facts, and an accountant or lawyer should confirm it. Removing non-active assets before a sale is also a separate planning topic that needs professional review.

What to do next

The best time to look at the exemption is well before a buyer appears, because the holding and asset tests look back over 24 months. Planning late can leave little room to fix problems.

• List who has owned your shares over the past 24 months, and how they are related to you.
• Get a current picture of what your corporation owns, separating active business assets from cash and investments.
• Gather records of any investment income or expenses since 1988, since Form T936 may apply.
• Ask your accountant to confirm the in-force LCGE amount for the year of your planned sale.
• Raise the share-versus-asset question with your lawyer before you sign a letter of intent.

Frequently asked questions