Lifetime Capital Gains Exemption
A Major Tax Break for Business Owners
If you plan to sell your business one day, the Lifetime Capital Gains Exemption (“LCGE”) can significantly reduce your tax bill.
Each individual can claim up to $1,250,000 of capital gains tax free on the sale of qualifying business shares.
Without proper planning, you could lose this benefit and pay approximately $250,000 or more in unnecessary tax per person.
Does Your Business Qualify?
To qualify, your company generally must:
- Be a Canadian controlled private corporation
• Carry on an active business in Canada
• Be owned for at least 24 months before the sale, and
• Meet strict asset tests
Asset tests require:
- At least 50% of assets used in the active business during the 24 months before sale
• At least 90% of assets used in the active business on the date of sale
These rules are technical and must be monitored over time.
Common Reasons Business Owners Lose the LCGE
Many businesses grow successfully but unintentionally disqualify themselves.
Common issues include:
- Too much excess cash inside the corporation
• Investment portfolios held in the company
• Life insurance policies with high cash values
• Real estate not used directly in the active business
• No advance planning before a sale
The LCGE is not automatic. It requires proactive planning.
Can It Be Fixed?
In some cases, yes.
Possible solutions may include:
- Moving passive assets into a holding company
• Paying out excess cash
• Corporate restructuring
However, these strategies can create additional tax costs. Early planning is always more effective than last minute fixes.
Multiply the LCGE for Your Family
With proper planning, a family trust may allow multiple family members to access their own exemption.
For a family of four, this could potentially mean up to $5 million dollars of capital gains sheltered from tax.
This must be structured properly and implemented in advance.
To learn more about family trust, please click the link here.
What About Alternative Minimum Tax?
Even if you qualify for the LCGE, you may still pay some tax in the year of sale.
Alternative Minimum Tax ensures that individuals pay at least a minimum amount of tax in a year, even if exemptions and deductions significantly reduce their regular tax calculation.
In most cases, this amount is far lower than the tax you would pay without the LCGE, and it may be recoverable in future years.
Plan Before You Sell
The best time to review your eligibility is long before you have a buyer.
A company that qualifies today may not qualify in two years if passive assets continue to build up.
Regular review and proactive planning are essential.
How Connectere CPA Can Help
At Connectere CPA Professional Corporation, we help business owners:
- Review whether their company qualifies
• Identify risks that may affect eligibility
• Design purification and restructuring strategies
• Implement family trust planning
• Prepare for a tax efficient business sale
If you are building a growing business or thinking about a future sale, now is the time to review your structure.
Book a consultation with Connectere CPA and ensure you maximize the value of your life’s work.
