Capital gains are a type of income you earn when you sell an investment that's appreciated. They're taxed, but the setup is pretty favourable for most investors. For the first $250,000 of gains each year, only half the amount is included in your taxable income (and taxed at your marginal rate). For anything above that, 66.67% of your capital gains are taxable at your normal marginal rate. But what if you're a small-business owner, farmer, or fisher selling qualifying property? That's where the Lifetime Capital Gains Exemption (LCGE) comes in — and it can save you a significant amount of money.
What is the lifetime capital gains exemption?
The LCGE is a tax provision that lets small-business owners and their family members avoid paying taxes on capital gains income up to a certain amount when they sell shares in the business, a farm property, or a fishing property. It's not intended to protect personal capital gains.
The LCGE has an exemption limit that's indexed to inflation — currently $1,275,000 for qualified small business corporation shares and qualified farm or fishing property.
How the lifetime capital gains exemption works
The LCGE works by allowing you to subtract up to the exemption limit from your capital gains when you sell qualifying property. Here's the key distinction: the exemption limit is $1,275,000, but since only a portion of capital gains are taxable, the actual deduction you claim on your tax return is less than the full exemption amount.
For capital gains up to $250,000 in a given year, the inclusion rate is 50% — meaning half your gain is taxable. For gains above $250,000, the inclusion rate rises to 66.67%. The LCGE shelters your gains from both tiers.
The exemption is cumulative over your lifetime. You don't have to use it all at once — you can apply portions of it across multiple qualifying sales until you've reached the full limit.
LCGE exemption limit
For 2025, the LCGE is $1,275,000 for dispositions of qualified small business corporation shares and qualified farm or fishing property. This limit is indexed to inflation and adjusts each year.
It's worth noting the difference between the exemption and the deduction. The $1,275,000 is the exemption — the total amount of capital gains that can be sheltered. The deduction you actually claim on your tax return is 50% of the exemption, which works out to $625,000.
Year | LCGE limit | Maximum deduction (50%) |
|---|---|---|
| 2024 (before June 25) | $1,016,836 | $508,418 |
| 2024 (after June 25) | $1,250,000 | $625,000 |
| 2025 | $1,250,000 | $625,000 |
| 2026 | $1,275,000 | $637,500 |
Lifetime capital gains exemption eligibility
Eligibility is a little tricky, so it's a good idea to speak to a qualified accountant to confirm your eligibility. But you likely meet the criteria if:
Incorporation: Your small business is incorporated
Active business test: The majority of your business has been active in Canada for 2 years before the sale or more
Ownership: The shares are owned by you or someone related to you in the 2 years before the sale
Qualifying assets and property
Three kinds of assets and property qualify for the LCGE: small-business corporation shares, qualified farms, and qualified fisheries.
Small-business corporation shares
These are shares in a small business (not a public or large business) that is mostly owned by Canadians. If you want to transfer the shares of the business to your children, for example, it would benefit you to use the LCGE because otherwise it will be heavily taxed. There are ways to reduce capital gains tax, and the LCGE is a significant option for those who qualify.
Qualified farms and fisheries
You may qualify for the LCGE if you or your spouse own shares or an interest in a family farm or fishing corporation, or if you sell property like land, buildings, or fishing boats. You can also transfer milk and egg quotas (the purchased right to produce a set amount of milk/eggs) or fishing licences.
Example of the LCGE in action
Let's say you sell your shares in a qualifying small business corporation for $1,500,000, and your adjusted cost base is $200,000. Your total capital gain is $1,300,000.
Without the LCGE:
The first $250,000 of capital gains has a 50% inclusion rate: $125,000 is taxable
The remaining $1,050,000 has a 66.67% inclusion rate: $850,043 is taxable
Total taxable capital gain: $975,043
With the LCGE:
You subtract the $1,250,000 exemption from your $1,300,000 gain, leaving $50,000 in taxable capital gains
At the 50% inclusion rate, $25,000 is added to your taxable income
In this example, the LCGE saves you from paying tax on more than $900,000 of otherwise taxable income.
Canadian Entrepreneurs' Incentive
Introduced as part of the 2024 federal budget, the Canadian Entrepreneurs' Incentive (CEI) provides an additional tax break on top of the LCGE. It applies to qualifying dispositions of small business shares and offers a reduced inclusion rate of 33.33% on up to $2,000,000 in capital gains — above and beyond the LCGE.
The CEI is being phased in gradually, with the limit increasing by $200,000 per year starting in 2025, reaching its full $2,000,000 cap by 2034. Not all businesses qualify — professional corporations (such as those owned by doctors, lawyers, or accountants) and certain industries are excluded.
If you're eligible for both the LCGE and the CEI, you could eventually shelter up to $3,250,000 in capital gains from the sale of qualifying small business shares.
How to claim the lifetime capital gains exemption
Once you've consulted an accountant and determined that you meet the necessary criteria, sell your business shares at a gain and claim the exemption in your next tax return, as you would any other capital gain. You'll need to complete Form T657, Calculation of Capital Gains Deduction, and file it with your return. If you have investment income or investment expenses, you may also need Form T936 to calculate your Cumulative Net Investment Loss (CNIL).
Keep in mind that any net investment losses you've accumulated over the years can reduce your available LCGE room. This is another reason to plan ahead with a tax professional.
The bottom line on the lifetime capital gains exemption
The LCGE is a substantial tax benefit available to Canadian small-business owners, farmers, and fishers. It can shelter up to $1,275,000 in capital gains when you sell qualifying property — potentially saving hundreds of thousands of dollars in income tax. Combined with the new CEI, the potential tax savings are even larger.
Because the eligibility rules are specific and the stakes are high, it's worth working with a qualified accountant or tax professional well in advance of any sale. Planning ahead can help you structure the transaction to make the most of the exemption.
