Business Exit Planning (Canada)

Selling a Canadian business is rarely a one-year project. The Lifetime Capital Gains Exemption, the share-vs-asset choice, and the corporate purification window all push the real planning horizon back to two to five years before deal time.

Last reviewed: May 25, 2026

Guidance, not advice. We explain the rules, we don't assess your situation. Always seek financial or tax advice from your accountant, or contact CRA. Read our editorial scope →

1. Why Canada is different

The Lifetime Capital Gains Exemption (LCGE) for Qualified Small Business Corporation (QSBC) shares is $1,250,000 for 2025 dispositions (ITA s.110.6). At the 50% capital gains inclusion rate, that shelters up to $625,000 of taxable capital gain per shareholder, per lifetime.

A husband-and-wife shareholder pair that both qualify can shelter $2.5M of gain on a single business sale — but only if the QSBC tests are met and the purification window has been respected.

2. Share sale vs asset sale

	Share sale	Asset sale
Seller tax	Capital gain — LCGE accessible	Double tax: corp on assets, then shareholder on extraction
Buyer position	Inherits all liabilities (tax, litigation, warranty)	Clean — picks assets, leaves liabilities behind
CCA / depreciation	Buyer inherits ACB	Buyer gets stepped-up cost base
Negotiation	Buyer usually demands 5–15% price discount	Higher price, but seller pays the extra tax

Most deals settle on shares with a discount, because the LCGE swing is larger than the discount. If neither spouse qualifies for LCGE, the calculus shifts.

3. QSBC qualification — the three tests

At-disposition test (90%): at the moment of sale, ≥90% of the FMV of the corporation's assets must be used in an active business carried on primarily in Canada (ITA s.110.6(1)).
24-month holding test (50%): throughout the 24 months ending on disposition, >50% of FMV of assets must have been active-business assets.
Holding-period test: the shares must have been held by the taxpayer or a related person throughout the 24 months before sale.

The LCGE is claimed on line 25400 of the T1.

4. Purification — fixing the 90% test

Excess cash, marketable securities, surplus real estate, and passive investments all count against the 90%/50% tests. Purification means removing those before disposition:

Pay down corporate debt
Pay catch-up dividends or bonuses to extract surplus cash
Move passive investments to a sister holdco (s.55(3)(a) butterfly)
Reinvest cash into active business assets — equipment, inventory, expansion

The 24-month lookback is unforgiving. Purification that happens 18 months out can still fail the 50% test for the prior six months. Start at least two years before the intended sale window.

5. Tax mechanics

Capital gain = proceeds − ACB − selling costs
Inclusion rate: 50% (the 2024 budget's 66.67% rate was reversed in 2025)
Capital gains reserve (s.40(1)(a)(iii)): spread the gain over up to five years where proceeds are deferred — maximum 80%/60%/40%/20%/0% per year
The Cumulative Net Investment Loss (CNIL) account erodes LCGE dollar-for-dollar; review Form T936 before claiming
Alternative Minimum Tax (AMT, s.127.5) is now triggered at lower thresholds since the 2024 reform — watch for it in big LCGE years

6. Related-party traps

s.84.1: anti-surplus-stripping rule on non-arm's-length share sales. Selling your shares to a corporation owned by an adult child or sibling can convert what looks like a capital gain into a deemed dividend — destroying the LCGE. Bill C-208 and subsequent amendments narrowed the relief.
s.73: spousal rollover allows transfer at ACB, but the gain eventually crystallises in the recipient spouse.
s.86: share exchange used in estate freezes — done correctly it is tax-deferred; sloppily executed it triggers immediate gain.

7. Estate freeze

A classic exit precursor: the founder exchanges their common shares for fixed-value preferred shares (s.86 or s.85(1)), locking today's value in their hands. New common shares are issued to the next generation (or a family trust) so that all future growth accrues to them.

Post-2018 TOSI rules (s.120.4) constrain dividend sprinkling through family trusts to adult children unless the excluded-business or excluded-shares tests are met — see the TOSI guide.

8. Retirement income impact

OAS clawback (15% recovery tax) begins at $93,454 for the 2024 benefit year (indexed)
OAS is fully clawed back around $151k–$157k depending on age
A sale year can be the highest-tax year of a founder's life — the LCGE shelters the capital gain but the remaining taxable gain still adds to net income
Plan post-sale income with RRSP melt-downs, TFSA contributions, and dividend timing

9. Worked examples

Worked example 1

$1.5M share sale — single shareholder, full LCGE available

Proceeds                              $1,500,000
  ACB                                       (1,000)
  Selling costs                            (50,000)
  Capital gain                          $1,449,000
  LCGE applied                         (1,250,000)
  Remaining capital gain                  $199,000
  Taxable cap gain (50% inclusion)         $99,500
  Approx fed+prov tax (ON, ~50% MTR)       $49,750
  Effective tax on $1.5M proceeds             3.3%

Worked example 2

$3M sale with reserve + CNIL pressure

Proceeds                              $3,000,000
  ACB                                      (50,000)
  Capital gain                          $2,950,000
  LCGE (capped)                        (1,250,000)
  Net taxable gain pool                 $1,700,000

  CNIL balance reduces LCGE              ($75,000)
  Effective LCGE shelter                $1,175,000

  40% paid at close, 60% over 4 yrs.
  Reserve spreads taxable gain — peak
  marginal year can be capped by
  electing reserve amounts strategically.
  Watch AMT in the closing year.

10. Timeline

2–5 years out: begin purification, normalise financials, separate passive assets into holdco
12–24 months out: finalise QSBC tests, engage M&A advisor, quality of earnings report, family trust review
6 months out: data room, LOI, due diligence preparation
Deal time: APA negotiation, reserve election planning, post-close income smoothing plan

Related calculators and guides

Last reviewed: May 25, 2026