Lifetime Capital Gains Exemption
The LCGE shelters up to $1,250,000 of capital gains on the sale of Qualified Small Business Corporation shares — one of the largest tax shelters available to Canadian entrepreneurs. Eligibility depends on structural tests measured at the moment of sale and across the 24 months prior; most failed LCGE claims trace to inadequate purification planning years earlier.
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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. The $1.25M limit
Increased to $1,250,000 for dispositions on or after 25 June 2024 and indexed thereafter (ITA s. 110.6(2.1)). Separate, higher LCGE ($1M) for qualified farm or fishing property.
2. QSBC share criteria — s. 110.6
- At the moment of sale: ≥90% of FMV of assets used in active business carried on primarily in Canada by the CCPC or a connected corporation.
- Throughout the 24 months before sale: ≥50% of FMV of assets used in active business; and
- Holding period: shares owned by the individual (or related person) for the entire 24 months.
- The corporation is a CCPC throughout.
3. Purification strategies
A CCPC accumulating passive investments may fail the 90%/50% tests. Standard purification techniques:
- Pay out excess passive cash as dividends pre-sale (mind CDA and RDTOH balances)
- Hive off investments to a HoldCo via s. 85 rollover before the 24-month window
- Acquire active business assets (deploy cash into operations)
- Sale-and-leaseback or similar to reposition real estate as active-use
Purification must occur outside the 24-month window for the 50% test; rushed last-minute purification frequently fails on audit.
4. CNIL — the silent reducer
Your Cumulative Net Investment Loss account (s. 110.6(1)) reduces the LCGE available in any year. CNIL accumulates where investment expenses (e.g., interest on investment loans) exceed investment income across all years. A material CNIL can wipe out the LCGE; manage interest deductibility annually rather than discover the problem at sale.
5. Crystallization planning
Where future sale is uncertain, an in-year crystallization — internal share exchange that triggers a deemed disposition at FMV using the LCGE — locks in current LCGE limits and increases ACB for future sale. Used carefully with s. 85/86 rollovers.
6. TOSI interaction
Capital gains triggering the LCGE on QSBC shares are generally excluded from TOSI, preserving family-LCGE multiplication on a true sale even where dividend income would have been caught.
7. Canadian Entrepreneurs' Incentive
The CEI was proposed in Budget 2024 to provide a reduced 33.3% inclusion rate on up to $2M of additional eligible gains (phased in). Enactment status has shifted with subsequent fiscal updates — verify current status with CRA before relying on it.
8. Claiming process — Form T657
The claim is filed on Form T657 alongside the personal T1 in the year of disposition. QSBC determinations attach. Keep purification documentation, asset valuations, and shareholding history for at least 6 years after the year of claim.
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