How the Lifetime Capital Gains Exemption (LCGE) Works in Canada

Introduction

The Lifetime Capital Gains Exemption (LCGE) is a significant tax benefit available to Canadian business owners, farmers, and fishers. It allows eligible taxpayers to shelter a portion of their capital gains from taxation when selling qualifying assets, such as shares in a Canadian-controlled private corporation (CCPC) or certain farm and fishing properties.

Understanding how the LCGE works can help minimize tax liabilities when selling a business or qualifying property. This guide explains who qualifies, how much you can claim, and how to maximize your tax benefits under the LCGE.

What Is the Lifetime Capital Gains Exemption (LCGE)?

The LCGE allows eligible individuals to exclude a portion of their capital gains from taxation when selling certain assets.

As of 2024, the maximum LCGE is:

• $1,016,836 for qualified small business corporation (QSBC) shares
• $1,000,000 for qualified farm or fishing properties

This exemption increases each year to account for inflation.

Who Qualifies for the LCGE?

To claim the LCGE, the property being sold must meet certain eligibility requirements. The exemption applies to three types of assets:

1. Shares in a Canadian-Controlled Private Corporation (CCPC)
   • The business must be an active small business operating in Canada.
   • At least 90% of the corporation’s assets must be used in an active business in Canada at the time of sale.
   • The seller must have owned the shares for at least 24 months before the sale.
2. Qualified Farm Property
   • The property must have been used in an active farming business in Canada.
   • The owner (or a family member) must have been actively involved in the farming business for at least 2 years.
   • The property must have been owned for at least 24 months before the sale.
3. Qualified Fishing Property
   • The property must be used in an active fishing business in Canada.
   • The owner or family member must have actively participated in the fishing business for at least 2 years.
   • The property must have been owned for at least 24 months before the sale.

How the LCGE Works in Practice

Example 1: Selling a Small Business

Lisa owns a Canadian-controlled private corporation (CCPC), which she sells for $1,200,000.

• The LCGE for QSBC shares in 2024 is $1,016,836.
• Lisa’s capital gain is calculated as:
  • Total sale price: $1,200,000
  • Original purchase price: $200,000
  • Capital gain = $1,200,000 - $200,000 = $1,000,000
• Since her gain is below the LCGE limit, she pays no tax on the sale.

Example 2: Selling Farm Property

John sells his family farm for $1,500,000.

• The LCGE for farm properties is $1,000,000.
• John’s capital gain is calculated as:
  • Total sale price: $1,500,000
  • Original purchase price: $500,000
  • Capital gain = $1,500,000 - $500,000 = $1,000,000
• Since the gain matches the LCGE limit, John pays no tax on the sale.

How to Maximize the LCGE

1. Use the Exemption Strategically
   • If your capital gain exceeds the LCGE limit, consider spreading the sale over multiple years to reduce tax liability.
   • Family members who own shares in the business may also claim the LCGE separately.
2. Ensure Your Business or Property Qualifies
   • Keep detailed records to prove that your business meets LCGE eligibility requirements.
   • If your business has too many passive investments, restructure before selling to maintain LCGE eligibility.
3. Plan Ahead for Succession
   • If you plan to transfer your business to a family member, proper tax planning can help maximize the LCGE benefits while avoiding unnecessary tax consequences.

Common Mistakes to Avoid

Assuming all business sales qualify: Your business must be an active business, and at least 90% of its assets must be used in active operations.

Selling too soon: The business or property must have been owned for at least 24 months before the sale.

Not using proper tax planning: If your capital gain exceeds the LCGE limit, you could be subject to significant capital gains tax.

Conclusion

The Lifetime Capital Gains Exemption (LCGE) is a valuable tax-saving tool for business owners, farmers, and fishers in Canada. Proper planning ensures that you maximize tax benefits while complying with CRA regulations.

Tax Partners can help you structure your business sale or property transfer efficiently to take full advantage of the LCGE and minimize tax liabilities.

This article is written for educational purposes.

Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.

Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.