The Lifetime Capital Gains Exemption (LCGE) is a valuable tax provision in Canada that allows individuals to exclude a portion of capital gains from taxation when disposing of certain types of property. The LCGE is governed primarily by section 110.6 of the Income Tax Act, with additional implications in sections 84.1, 248, and others depending on the nature of the transaction.
What is the Lifetime Capital Gains Exemption?
The LCGE permits Canadian residents to claim a deduction on capital gains realized from the sale of:
- Qualified small business corporation shares (QSBCS)
- Qualified farm or fishing property (QFFP)
This exemption effectively reduces the taxable portion of the capital gain, potentially resulting in significant tax savings. It’s important to note that the LCGE is cumulative over an individual’s lifetime, meaning once the limit is reached, no further exemptions can be claimed.
Eligibility Criteria
To be eligible for the LCGE, the following conditions must be met:
- Canadian Residency: You must be a resident of Canada throughout the year in which you claim the exemption.
- Qualified Property: The property disposed of must qualify as either QSBCS or QFFP.
As defined in subsection 110.6(1) of the Income Tax Act, QSBC shares must meet three key criteria:
- At the time of sale, the share must be of a Small Business Corporation (SBC) owned by the individual, their spouse or common-law partner, or a related partnership.
- Throughout the 24 months immediately before the sale, the share must have been owned by the individual (or related party) and the corporation must have been a Canadian-Controlled Private Corporation (CCPC).
- During that same 24-month period, more than 50% of the fair market value of the corporation’s assets must have been used in an active business carried on primarily in Canada, invested in shares or debt of connected corporations, or a combination of these.
What is an “Active Business”?
An active business, as referred to in subsection 248(1) of the ITA, generally means any business carried on to produce income, excluding a specified investment business (such as a company earning passive income like rent or dividends) or a personal services business (where a person acts as an incorporated employee). Examples of active business activities include retail operations, manufacturing, trades, or professional services. The CRA looks at the nature of the income and the operations to determine whether the business qualifies as “active.”
When the Exemption May Apply
The LCGE often applies during business transitions. A common scenario is the sale of a family-owned business, such as a retail store, manufacturing company, or service-based business, where the shares meet the QSBC criteria. Similarly, family farm or fishing operations passed down through generations may trigger the exemption when land or equipment is sold or transferred. Another example is retirement planning, where an owner sells their qualifying business to fund retirement.
In recent years, intergenerational transfers — such as parents selling a farm or business to their children — have also become more frequent. In all these cases, if the property qualifies and the taxpayer meets the criteria, the LCGE can be used to shelter up to $1.25 million in capital gains from tax.
Recent Changes
Effective June 25, 2024, the LCGE limit has been increased from $1,016,836 to $1.25 million. This adjustment aims to provide greater tax relief to individuals disposing of qualifying properties. It’s important to note that this increase applies to dispositions occurring on or after this date.
Conclusion
The Lifetime Capital Gains Exemption offers significant tax advantages for Canadian residents disposing of qualified small business shares or farm/fishing property. With the recent increase in the exemption limit, it’s an opportune time to assess your assets and consider potential tax planning strategies.
Consulting with a tax professional at Mills & Mills LLP can help ensure you maximize the benefits of the LCGE while remaining compliant with the Income Tax Act.
At Mills & Mills LLP, our lawyers regularly help clients with a wide range of legal matters including business law, real estate law, estate law, employment law, health law, and tax law. For over 140 years, we have earned a reputation amongst our peers and clients for quality of service and breadth of knowledge. Contact us online or at (416) 863-0125. The material provided through the Mills & Mills LLP website is for general information purposes only. It is not intended to provide legal advice or opinions of any kind.
2 St Clair Ave West
