Lifetime Capital Gains Exemption: Selling a Small Business in British Columbia

If you own shares of your private company and plan to sell them, the lifetime capital gains exemption (LCGE) may shelter part or all of the gain from tax. It is one of the most valuable tax rules for owners of small businesses, and one of the easiest to lose by missing a technical test.

This article explains the basics for owners in British Columbia. The exemption is a federal rule that applies the same way in BC. It is general information, and your accountant should confirm eligibility well before a sale.

This article covers the law of British Columbia.

What the exemption is and who can use it

The LCGE lets an individual deduct a capital gain on qualifying property up to a lifetime limit. It is available only to individuals disposing of qualified shares (or farm or fishing property). It does not apply where a corporation sells its own assets, and asset sales by a corporation do not use the share tests described below.

That makes the form of your sale important. A buyer may prefer to buy assets, while you may do better selling shares. Raise this early in negotiations.

How much can it shelter?

The CRA describes the LCGE for 2025 as $1,250,000 for dispositions of qualifying property, so the maximum deduction is $625,000, which is 50% of the LCGE, and this is presented as subject to proposed changes. The limit is indexed to inflation. Because of that, confirm the current enacted figure with your accountant before you rely on a dollar amount.

The deduction for qualified small business corporation (QSBC) shares is the least of four amounts: the formula amount in s. 110.6(2)(a) of the Income Tax Act, which starts from $625,000 less amounts previously claimed, the cumulative gains limit, the annual gains limit, and the net capital gains from QSBC shares for the year. In other words, earlier claims and other factors can reduce what is left.

A separate additional deduction, capped at $116,582, applies for dispositions on or after June 25, 2024, in the year that includes that date. It does not apply to sales in later years.

The tests your shares must pass

Section 110.6(1) of the Income Tax Act defines a qualified small business corporation share. In summary:

Passive assets such as excess cash or investments can cause a company to fail these tests. Owners sometimes need advance planning to meet them.

Things that can reduce or deny the deduction

• Cumulative net investment loss (CNIL): the deduction is reduced by your CNIL. If you are claiming the deduction and have investment income or expenses from 1988 onward, you must complete Form T936, Calculation of Cumulative Net Investment Loss, and keep investment income and expense records if you own QSBC shares.
• Series of transactions: s. 110.6(7) denies the deduction where the disposition is part of a series that includes a dividend caught by s. 55(2), or in which a corporation or partnership acquires property for significantly less than fair market value.

Separately, the CRA describes proposed changes for qualifying dispositions after December 31, 2024: an expanded definition of eligible small business corporation and a $100 million asset limit. Under these proposals, you would have until the end of the calendar year following the disposition to acquire replacement shares. Whether these have become law is worth confirming with your accountant.

What to do next

• Ask your accountant to test the 24-month and 90% asset tests now, not at closing.
• Gather your share ownership records, including any past transfers.
• Find out whether you have claimed any exemption before.
• Gather investment income and expense records for Form T936.
• Have a lawyer review any pre-sale reorganization and the purchase agreement.

Reorganizations done shortly before a sale can affect the ownership and series-of-transactions rules, so get advice before you restructure.

Frequently asked questions