How can I use the Lifetime Capital Gains Exemption (LCGE) when selling my business?

To use the Lifetime Capital Gains Exemption (LCGE) when selling your business, structure the sale as a share sale of qualified small business corporation (QSBC) shares that meet CRA's tests: throughout the 24 months before the sale, the shares were owned only by you or a related person and more than 50% of the fair market value of the corporation's assets were used mainly in an active business carried on primarily in Canada; and at the time of sale, all or most (90% or more) of those assets meet that test (CRA guide T4037, Capital Gains – 2025). CRA publishes the current LCGE limit on its capital gains deduction page (CRA, Line 25400 – Capital gains deduction); confirm it with your accountant before relying on a dollar figure.

What is the Lifetime Capital Gains Exemption (LCGE)?

The LCGE is a federal tax benefit that exempts capital gains on the sale of QSBC shares, qualified farm property, or qualified fishing property from taxable income. Only individuals (including certain trusts) can claim the LCGE — corporations cannot.

The exemption is a lifetime limit. Once you use the full amount, you cannot claim it again on future dispositions unless the indexed limit increases in subsequent years. The limit can change from year to year, so check the current amount before planning.

Current LCGE limits and indexed amounts

CRA publishes the current LCGE limit on its capital gains deduction page (CRA, Line 25400 – Capital gains deduction); confirm it with your accountant before relying on a dollar figure. The capital gains inclusion rate is one-half: CRA's capital gains guide gives the inclusion rate as 1/2 (CRA guide T4037, Capital Gains – 2025), and in September 2026 the Department of Finance confirmed it is "cancelling the proposed increase in the capital gains inclusion rate" (Department of Finance, September 15, 2026). Gains not sheltered by the LCGE are taxed on that basis.

Qualifying for LCGE: Qualified Small Business Corporation (QSBC) shares

The LCGE applies only to the sale of Qualified Small Business Corporation (QSBC) shares, qualified farm property, or qualified fishing property. Most business owners will be concerned with QSBC shares.

To qualify as a QSBC, the shares must be shares of a Canadian-controlled private corporation (CCPC). Three tests determine whether your shares qualify at the time of sale:

The 24-month holding period requirement

Throughout the 24 months immediately before the sale, no one other than you, a partnership you were a member of, or a person related to you may have owned the shares (CRA guide T4037, Capital Gains – 2025). If the shares were issued or acquired recently — for example, because you only recently incorporated or reorganized — you may not meet this test, even if you started the business years earlier.

Business owners planning to use the LCGE should work with a tax accountant or tax lawyer well before a planned sale to confirm the corporation's structure and asset composition meet the QSBC requirements.

The 50% asset test

Throughout the 24 months before the sale, more than 50% of the fair market value of the corporation's assets must have been used mainly in an active business carried on primarily in Canada, or be qualifying shares or debts of connected corporations (CRA guide T4037, Capital Gains – 2025).

Passive assets — such as property not used in the active business, investment portfolios, or significant excess cash — can cause the corporation to fail this test.

The 90% asset test

At the time of sale, all or most (90% or more) of the fair market value of the corporation's assets must be used mainly in an active business carried on primarily in Canada, or be qualifying shares or debts of connected corporations (CRA guide T4037, Capital Gains – 2025).

Purifying the corporation before the sale — moving out non-qualifying assets such as excess cash, marketable securities, or real property not used in the active business — is a common way to meet both tests; it needs to happen well before the sale.

Share sale vs. asset sale: Why structure matters

The LCGE applies only to share sales, not asset sales. Asset sales do not qualify for LCGE because the exemption applies to capital gains on qualifying shares or property, not the direct sale of business assets.

Structuring a transaction as a share sale rather than an asset sale can preserve the seller's ability to claim the LCGE, potentially saving hundreds of thousands of dollars in tax.

Buyers commonly prefer asset purchases to avoid inheriting the seller's liabilities and to obtain a stepped-up cost base for tax depreciation purposes. The seller's desire to use the LCGE creates a negotiation point. Some sellers offer a price concession or other deal terms to compensate the buyer for accepting a share sale structure when the tax savings justify it.

The allocation of the purchase price between shares and personal goodwill, or the use of holdbacks and earnouts, can affect LCGE eligibility and must be structured carefully. Misallocation can trigger CRA scrutiny or reduce the exemption available.

Tax planning and professional advice requirements

Claiming the LCGE requires filing Form T657 (Calculation of Capital Gains Deduction) with the individual's tax return in the year of the sale.

The cumulative gains limit and the annual gains limit can restrict the amount of LCGE that can be claimed in a given year if the individual has previously claimed capital gains deductions or has certain investment losses. Net capital losses from other years and Allowable Business Investment Losses (ABILs) can reduce the amount of LCGE available.

For family business succession, the LCGE can be multiplied across multiple family members if shares are held by a family trust or distributed to family members who each qualify for the exemption. This requires advance planning and professional advice to structure correctly.

The LCGE does not apply to capital gains realized by corporations, only to individuals (including trusts in certain circumstances). If your business is held through a holding company structure, confirm with a tax advisor whether the shares you intend to sell qualify as QSBC shares.

This article is for informational purposes only and does not constitute financial, legal, or tax advice. Every business sale is different, and the LCGE rules are complex. Before making decisions about deal structure, tax planning, or claiming the LCGE, consult a qualified tax accountant or tax lawyer familiar with your specific situation.

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