Lifetime capital gains exemption (LCGE)

• Lifetime limit of approximately $1.25 million (effective June 2024, adjusted for inflation thereafter) of tax-exempt gains
• Applies primarily to AAPE (eligible SME shares), which are shares of a local private SME
• Requirements: Hold the shares for at least 24 months, and the company must actually conduct business in Canada
• At the time of sale, approximately 90% of the company’s assets must be used for its business operations, not held as investments
• Keep an eye on this: The alternative minimum tax (AMT), which will be revised in 2024, may reduce the immediate benefit of the exemption on a large gain

If you ever sell your incorporated business, the LCGE can turn a heavily taxed sale into an almost tax-free profit: this is often the biggest savings of an entrepreneur’s career, sometimes amounting to hundreds of thousands of dollars kept in your pocket. The catch is that you need to start preparing for eligibility years in advance. Think of the company as a suitcase for a flight: if it’s full of things that have nothing to do with the trip (too much idle cash or investments), it may be denied boarding, in this case, disqualifying your shares at the time of sale. We recommend having your shares reviewed well before receiving an offer, and “cleaning up” the company as needed. The LCGE is often prepared in conjunction with a estate freeze, a family trust (to maximize the exemption among family members) or a Application of Section 85, and is claimed using the form T657 from the CRA. We’re here to help: Bankeo will connect you, for free, with a vetted accountant or Chartered Professional Accountant who specializes in this type of sale.

What exactly is the LCGE?

It’s a tax break available to individuals who sell shares in their small businesses. In practical terms, your capital gains are exempt from federal and Quebec income tax up to approximately $1.25 million over your lifetime. If you fully utilize the limit, the savings can exceed several hundred thousand dollars, depending on your situation and the limit in effect for the year of the sale.

Which stocks qualify for the LCGE?

Especially APEs (eligible small business shares): shares of a Canadian-controlled private corporation (controlled by Canadian residents) held for at least 24 months, where more than half of the company’s assets were used in its active business operations during that period and approximately 90% at the time of sale. Eligible farms and fishing businesses are also eligible.

How can you prepare to take advantage of it?

By periodically verifying that the company remains eligible, by withdrawing excess cash and investments that are sitting idle in the business, and sometimes by sharing the exemption among several family members through a trust. These are strategies that should be developed with professionals well in advance. We’re here to support you: Bankeo will connect you, for free, with a vetted accountant or CPA who specializes in this type of sale.