Lifetime Capital Gains Exemption Explained

Capital gains are a type of income you earn when you sell an investment that has appreciated. They are taxed, but it’s a pretty nice setup 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.

What is the lifetime capital gains exemption?

The lifetime capital gains exemptions (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.

LCGE has an exemption limit for qualified farm and fishing property or qualified small business corporation shares of $1,250,000. This amount is indexed to inflation.

With LCGE, you’re allowed to subtract your taxable amount from your profits.

Note that the LCGE is cumulative lifetime limit. You can keep using it until you reach the full amount.

Lifetime capital gains exemption eligibility

Eligibility is a little tricky, so we suggest you speak to a qualified accountant to confirm your eligibility. But you likely meet the criteria if:

• Your small business is incorporated

• The majority of your business has been active in Canada for two years before the sale or more

• The shares are owned by you or someone related to you in the two years before the sale

Qualifying assets/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.

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 licenses.

How to claim the lifetime capital gains tax exemption

Once you have consulted an accountant and determined that you meet the necessary criteria, simply sell your business shares at a gain and claim the exemption in your next tax return, as you would any other capital gain.