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Lifetime Capital Gains Exemption & Qualifying Small Business Corporation

Lifetime Capital Gains Exemption & Qualifying Small Business Corporation

A once in a lifetime Capita Gains Exemption (LCGE) tax deduction of $892,218 (2021, indexed to inflation) is available to a Canadian resident who realizes a capital gain on the sale/disposition of shares in a Qualified Small Business Corporation (QSBC) and certain other capital properties. Other qualifying property includes Qualified Farm Property and Qualified Fishing Properties.

In order to claim the “LCGE” the capital gain must be realized by an individual, trust or partnership, with the capital gain being allocated to and individual who has a “LCGE” balance available to them, meaning that they have not utilized the full “LCGE” in the past. If they have realized a “LCGE’ previously, the amount available to them is $892,218 (2021) less any amount claimed in previous years.

Qualifying Small Business Shares (QSBC)
These are shares owned by an individual, trust or partnership in Canadians Controlled Private Corporations (CCPC), not in public, large corporation, or mutual funds.

Canadian Controlled Private Corporation (CCPC)
A “CCPC” is a corporation that at the end of the taxation year must be: a) a private corporation, shares not listed on a designated stock exchange; b) resident of Canada; c) be incorporated in Canada, provincially or federally; d) not be controlled directly or indirectly by non-residents, public corporations or a Canadian resident corporation listing its shares on a foreign stock exchange;

Lifetime Capital Gains Exemption Qualifying Criteria
There are three tests that have to met in order to qualify for the “LCGE”:

Small Business Corporation Test
At the time the shares are sold, the shares must be shares of a Small Business Corporation or Canadian Controlled Private Corporation (CCPC) and all or substantially all, at least 90% of the fair market value of the corporation’s assets are directly or indirectly are used principally to carry on a business in Canada or as a holding company for such a corporation.
The 90% test is based on the Fair Market Value of all assets at the time of disposition of the shares, including Goodwill which may or may not be noted in the financial statements.
Investments in term deposits, mutual funds, shares of public corporations, cash deposits not required for daily operations etc. do not qualify as assets used to carry on a business.

Holding Period Test
The share must be owned by the taxpayer, taxpayer’s spouse/common law partner, or a partnership related to the taxpayer. The shares must not have been owned by anyone other than the taxpayer or a related person during the 24 months prior to the disposition/sale of shares.

Fair Market Value Test
Throughout the 24 month period preceding the disposition, the shares were share of a CCPC of which more than 50% of the Fair Market Value of the assets were used in active business carried on in Canada by the corporation or by a corporation related to it.

If the corporation has more than 10% of the fair market value in non-qualifying assets such as excess cash, investments in mutual funds, GIC’s, notes, public corporation shares etc. at time of sale it will not meet the Small Business corporation test. This is because all or substantially all of the fair market value of the assets, more than 90%, are not used in Active Business in Canada. The corporation must “purify” the assets in order to qualify for the “LCGE”.

Purification can be a simple as paying off any corporate debt, paying dividends or bonuses, or moving the assets to another corporation.


This course material deals with complex matters and may not apply to particular facts and circumstances. As well, the course material and the references contained therein reflect laws and practices which are subject to change. For these reasons, the course material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter. Although the course material has been carefully prepared, neither the author, and/or firm, nor any persons involved in the preparation and/or instruction of the material accepts any legal responsibility for its contents or for any consequences arising from its use.

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