The lifetime capital gains exemption in Canada can shelter up to $1,275,000 of qualifying capital gains from regular income tax in 2026 when you sell shares of your small business. Alternative minimum tax can still apply. For a founder selling after years of work, the exemption can mean a six-figure tax saving.
The exemption only applies if your company passes strict tests on the day you sell and for two years before.
Below are the 2026 limit, the tests your shares must pass, and how to plan a sale that qualifies.
Use the lifetime capital gains exemption in Canada
The lifetime capital gains exemption (LCGE) shelters capital gains on three kinds of property: qualified small business corporation (QSBC) shares, qualified farm property and qualified fishing property. Each person gets one lifetime limit, not a yearly one.
You can use it in one sale or spread it across several. Claims reduce your remaining lifetime exemption, and future increases in the indexed limit can create additional room.
Know the LCGE 2026 limit
| Period | LCGE limit | Maximum deduction (50%) |
|---|---|---|
| 2024, before June 25 | $1,016,836 | $508,418 |
| June 25, 2024 to 2025 | $1,250,000 | $625,000 |
| 2026 | $1,275,000 | $637,500 |
Budget 2024 introduced the $1.25M limit for sales after June 24, 2024, and Bill C-15 made it law on March 26, 2026. Indexing to inflation resumed in 2026, which brings the 2026 limit to $1,275,000.
Understand the exemption vs the deduction
Only half of a capital gain is taxable. So on your return, you claim a deduction equal to half the sheltered gain, on line 25400.
The CRA's capital gains deduction rules also require you to be a Canadian resident throughout the year of the sale. You also qualify if you were resident for part of that year and throughout the year before or the year after.
Ignore the cancelled 2024 proposals
Older articles mention a two-thirds inclusion rate and a Canadian Entrepreneurs' Incentive. Neither applies. The government cancelled the inclusion rate increase in March 2025, and Budget 2025 cancelled the incentive.
The general capital gains inclusion rate remains 50% under the current rules on capital gains tax in Canada.
Prove your qualified small business corporation shares
Your shares must meet three QSBC tests. Fail any one, and the gain does not qualify for the LCGE.
| Test | When it applies | What it requires |
|---|---|---|
| 90% asset test | On the day of sale | At least 90% of the company's assets, by fair market value, are used in an active business mainly in Canada |
| 24-month ownership test | The 24 months before the sale | No one other than you or a related person owned the shares |
| 50% asset test | Throughout those 24 months | More than 50% of the company's assets, by fair market value, were used in an active business mainly in Canada |
The company must also be a Canadian-controlled private corporation (CCPC) when you sell, and throughout the 24-month period while you or a related person held the shares. Qualifying shares or debt of connected corporations can also count toward the asset tests.
Pass the 90% asset test at sale
Owners often fail this test when cash builds up in the company. Excess cash and passive investments can put qualification at risk. Cash needed for operations and property used in the active business need a separate assessment.
Take a profitable company that has saved $500,000 of surplus cash in a GIC it does not need for operations. If that surplus pushes passive assets above 10% of the company's total fair market value, the shares fail the test, even though the business itself is entirely active. Purification fixes that, as explained below.
Meet the 24-month ownership test
If you incorporated less than two years ago, or bought the shares from an unrelated person recently, you can fail the test. Shares issued from treasury are generally treated as owned by someone else unless they're issued for an active business or other qualifying shares.
Watch the holding company rules
If you own your operating company through a holding company, the tests look through the structure. The holding company's own assets, such as investments, can pull the group below the thresholds.
A holding company still helps with purification and estate planning, but you have to set it up with the tests in mind.
Claim the capital gains exemption when selling your business
For an incorporated operating business, the LCGE generally applies to a qualifying shareholder's sale of QSBC shares, not the corporation's sale of business assets. If the buyer buys the company's assets instead, the gain lands in the corporation, and the exemption doesn't apply.
Buyers often prefer asset deals for their own tax reasons. Negotiating a share sale is one of the most valuable steps when you sell your business in Canada.
Purify your company before the sale
Purification means removing passive assets from the company so it passes the QSBC tests. Purification is the usual fix for a company that has done well and built up cash.
Remove passive assets in good time
The 90% test applies on the sale date, but the 50% test looks back 24 months. Purifying a month before closing can fix the first test and still fail the second.
For a sale two or three years away, we recommend starting the planning now.
Choose the right purification method
| Method | How it works | Watch out for |
|---|---|---|
| Dividend to a holding company | Excess cash is paid to a holding company that owns shares in the operating company, subject to applicable tax and anti-avoidance rules | Anti-avoidance rules that can turn the dividend into a taxable gain |
| Reorganization | Investments move into a separate sister company before the sale | Must be done carefully, often under section 85 |
| Pay down debt | Surplus cash repays loans | Only works if the company has debt |
| Reinvest in the business | Cash buys equipment or other active assets | Only makes sense if the business needs them |
| Pay out to shareholders | Cash comes out as salary or dividends | Personal tax on the payout |
The right method depends on how much is passive, how it's held and when you plan to sell.
Crystallize the exemption before growth
You don't need a buyer to use the LCGE. A crystallization is an internal transaction that triggers a capital gain on your shares now and shelters it with the exemption.
Your shares get a higher cost base, so future gains are smaller. Crystallizing locks in the exemption while the company still qualifies, in case it stops qualifying later.
Avoid AMT and other LCGE traps
Passing the QSBC tests doesn't guarantee a tax-free sale. Several other rules can reduce the exemption or add tax in the year you sell.
Plan for AMT in the sale year
The alternative minimum tax (AMT) is a parallel tax calculation. For AMT purposes, 30% of a gain sheltered by the LCGE still counts as income.
The result can be a tax bill even when your regular tax on the sale is zero. A gain near the full $1,275,000 limit, fully sheltered by the LCGE, can still produce AMT in the tens of thousands of dollars.
You can recover AMT through a minimum tax carryover during the following seven years, subject to the annual calculation. Any unused amount expires, so recovery is not guaranteed.
Check your CNIL before selling
Your cumulative net investment loss (CNIL) reduces the deduction you can claim. A CNIL builds up when your investment expenses, such as interest on investment loans, exceed your investment income since 1988.
Owner-managers who borrowed to invest can have a CNIL without knowing it. You can usually clear it by taking extra dividends or interest income before the sale year ends.
Account for past business investment losses
If you've claimed an allowable business investment loss (ABIL) in the past, it reduces the LCGE you have left. The reverse also applies: using the LCGE can turn a later business investment loss into an ordinary capital loss.
Stay a Canadian resident through the sale
You must be a Canadian resident throughout the year of sale, or for part of it if you were resident throughout the year before or after. If you plan to move abroad, we recommend selling, or crystallizing, before you leave. Leaving Canada also triggers departure tax on shares you still own.
Multiply the exemption with a family trust
The LCGE belongs to each person, not each business. A family that shares ownership of the company can use several exemptions on one sale.
See how the family trust structure works
The usual route is an estate freeze. You exchange your common shares for fixed-value preferred shares, and a family trust subscribes for new common shares that capture future growth.
When the company is sold, the trust allocates its share of the gain to beneficiaries. Each eligible beneficiary can claim their available LCGE on qualifying gains properly allocated and designated by the trust, subject to their individual deduction limits.
| Family members claiming | Potential gain sheltered in 2026 |
|---|---|
| 1 (owner only) | $1,275,000 |
| 2 (owner and spouse) | $2,550,000 |
| 4 (owner, spouse and two adult children) | $5,100,000 |
Respect the trust rules and timing
- The trust generally needs to hold its shares for 24 months before a sale.
- Beneficiaries must be Canadian residents to claim the exemption.
- Gains allocated to minor children can be hit by the tax on split income if the sale isn't to an arm's-length buyer.
- Each beneficiary faces their own AMT calculation in the sale year.
- The trust is deemed to sell its assets every 21 years, so the plan needs a timeline.
A freeze also fits naturally into family business succession planning, even if the next generation takes over instead of an outside buyer.
Shelter farm and fishing property gains
The same lifetime limit covers qualified farm or fishing property. That includes land, buildings, quotas and fishing licenses used in a farming or fishing business in Canada, plus shares of a family farm or fishing corporation.
Qualification depends on the property type, acquisition date, ownership history and farming or fishing use. Some properties must also meet revenue tests. The limit is shared: any LCGE used on farm or fishing property reduces what's left for business shares, and the other way around.
Let Bestax plan your tax-free sale
The LCGE rewards owners who plan two or three years ahead. Bestax builds that plan with you and carries it through to the return that claims the exemption.
See what the Bestax LCGE review covers
- QSBC test review: your company's assets checked against the 90% and 50% tests, plus the 24-month ownership history.
- Purification plan: the right method for moving passive assets out, and the timing that keeps both tests intact.
- Family structure: whether an estate freeze and family trust can multiply the exemption across your family.
- Pre-sale tax check: your CNIL, past ABILs, residency and an AMT estimate for the sale year.
- Deal structure: share sale or asset sale, price allocation and any reserve if the buyer pays over time.
- Filing: Form T657, Form T936 if needed, and the deduction on line 25400 of your return.
Send Bestax these records early
- Your company's last three years of financial statements.
- The share register and any changes in ownership.
- Details of cash, investments and other passive assets the company holds.
- Your past tax returns showing investment income, interest expenses and any ABIL claims.
- A rough timeline for the sale, even if no buyer is in place yet.
If a sale is on the horizon, book a call with our small business tax team. The earlier the review starts, the more of the exemption you keep.
Lifetime capital gains exemption Canada FAQs
No. Only individuals can claim it. A corporation that sells shares pays tax on the gain itself, which is why most owners sell the shares they hold personally or through a family trust.
Yes, in many cases. Rules introduced in recent years let a sale to the next generation be taxed as a capital gain instead of a dividend, provided the transfer meets strict conditions on control and timing.
A qualifying sale to an employee ownership trust or a worker cooperative can unlock a separate exemption of up to $10 million, on top of the LCGE. The exemption was set to expire at the end of 2026, but Bill C-30 made it permanent on June 18, 2026. The conditions are different, and the two exemptions must be coordinated rather than claimed twice on the same gain, so the sale needs its own review.
A qualifying capital gains reserve spreads recognition of the gain over several years. The LCGE limit that applies to that gain is based on the year you sold the property, not the later year when a reserve amount enters income. A reserve can generally run for up to five years, or 10 years for qualifying transfers to a child.
Yes. The deduction reduces your taxable income, so the sheltered gain escapes both federal and provincial income tax. AMT can still apply, as explained above.
Disclaimer: The information provided in this blog is for general informational purposes only. For professional assistance and advice, please contact experts.
