A tax benefit that some Canadian business owners may not know exists
Most business owners in Canada spend their time building their company serving customers and keeping operations running smoothly. The thought of selling the business often feels far away. Even if selling is not on your mind today there is an important tax break you should know about now. It is called the Lifetime Capital Gains Exemption or LCGE
The LCGE is one of the most valuable tools available for small business owners farmers and fishers. It allows you to sell qualifying assets and keep a significant portion of the profit without paying tax on it. This means you could walk away from a sale with far more money in your pocket than you expected
What the LCGE Does
When you sell a capital asset like shares in a qualified small business corporation or qualified farm or fishing property you would normally pay capital gains tax on the profit. The LCGE gives you the ability to exempt a large portion of those gains from tax entirely. It is a lifetime limit so you can use it in one large sale or over multiple smaller sales until you have used it up
In June 2024 the The Lifetime Capital Gains Exemption limit increased from just over one million dollars to one million two hundred fifty thousand dollars. This means that if your sale qualifies you can shelter up to that amount from capital gains tax. For someone in a high tax bracket this can mean hundreds of thousands of dollars in tax savings
Why This Matters Now
Even if you are years away from selling your business or property it pays to plan ahead. Certain rules must be met for a sale to qualify for the LCGE. For example your business needs to meet the qualified small business corporation test which includes conditions about how long you have owned the shares and the nature of the assets and activities of the business. These conditions can take time to arrange so advance planning is key
Many owners do not learn about the LCGE until they are in the process of selling. By that time it may be too late to make the changes needed to qualify. Missing out on this exemption could mean paying far more tax than necessary. Knowing about it now gives you time to make sure your business is structured correctly
Who Can Qualify for the lifetime capital gains exemption?
You may be eligible for the The Lifetime Capital Gains Exemption if you own shares in a Canadian business that meets the qualified small business corporation criteria. You may also qualify if you own certain farm or fishing property. The rules are detailed and the definition of a qualifying asset can be complex. That is why most owners work with an accountant or tax advisor to confirm eligibility well before any sale takes place
The Bigger Picture
The LCGE is not just about saving on taxes. It can be a key part of your retirement strategy or succession plan. If you are planning to pass your business to a family member you might still benefit from the exemption depending on how the transfer is structured. If you are selling to a third party the exemption can increase the net value of the deal making your years of hard work pay off more fully
Take Action Early
If you have never heard of the Lifetime Capital Gains Exemption before today it is worth taking some time to look into it. Speak to a tax professional and review your ownership structure. Make sure your business meets the qualifying criteria and that your records are in order. The rules are strict but with planning most business owners who qualify can make full use of the exemption
Selling a business is often the largest financial transaction of a lifetime. Knowing about the LCGE early can be the difference between paying a large tax bill or keeping a substantial sum for yourself your family or your future plans. It is one of the most generous provisions in Canadian tax law and it is available to those who take the time to prepare