SELLING YOUR BUSINESS? PLAN AHEAD
Keep More of Your Business Sale — Tax-Free
The Lifetime Capital Gains Exemption can shelter a large part of your gain when you sell qualifying shares. Qualifying takes planning, well before the sale. Let's make sure your shares are ready.
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What the LCGE actually does for you
When you sell shares of a qualifying small business — or a qualified farm or fishing property — the Lifetime Capital Gains Exemption can shelter a substantial part of your capital gain from tax. For an owner selling the company they’ve spent years building, that’s often the difference between a large tax bill at closing and keeping far more of what the business is worth. It’s one of the most valuable planning opportunities in Canadian tax, and it belongs to you as an individual, not to your corporation. Because the exemption amount is set by law and changes over time, we’ll walk you through what currently applies to your situation when we talk.
What qualifies (and what doesn't)
Three kinds of property can qualify: Qualified Small Business Corporation (QSBC) shares, qualified farm property, and qualified fishing property. These are the areas the government chooses to encourage. Publicly traded shares and rental real estate do not qualify, and the exemption is only available to individual Canadian residents — not corporations, though it can flow through a partnership or trust to individuals.
The tests your shares need to pass
To use the exemption on business shares, they generally have to meet a few conditions:
• At the time of sale, nearly all of the company’s assets are being used in an active business carried on mainly in Canada.
• For the two years leading up to the sale, the shares were owned only by you or someone related to you.
• Over that same period, most of the company’s assets were used in that active business.
The active-business asset test is where many owners get caught. If the company is sitting on surplus cash or investments, the shares may not qualify until the company is “purified” — restructured so it passes the test. That takes time, which is exactly why the conversation should happen well before you sell, not at closing.
Why it pays to plan early
Terms like “related,” “connected,” and “resident” have precise legal meanings, and your available exemption can be reduced by things like Cumulative Net Investment Losses. None of that is a reason to avoid the LCGE — it’s a reason to plan for it. If a sale or a transfer to the next generation is anywhere on your horizon, let’s look at your situation now, while there’s still room to structure it properly.
FAQ
A tax exemption that lets an individual shelter a large amount of capital gain from tax when they sell qualifying business, farm, or fishing property.
Qualified Small Business Corporation (QSBC) shares — private, Canadian-controlled companies whose assets are mostly used in an active business in Canada. Publicly traded shares don't qualify.
If it holds too much cash or investments, it can fail the asset test. Purifying moves those assets out so the shares qualify — best done well before a sale.
No — it's for individuals, though it can flow through a partnership or trust to individual Canadian residents.
As early as possible. The 24-month ownership and asset tests mean qualifying often depends on decisions made a year or more before you sell.