(Written by Gemini, edited by Jonathan Carter, CPA, CMA, CPB)

A Quick Note about AI

For this blog and a few of our other blogs moving forward, we are going to be experimenting with Google’s Gemini AI. KATA’s stance regarding the use of AI as a research tool is “Trust, but verify.” Therefore, the output provided by Gemini has been reviewed, corrected and edited where necessary. You may notice that the bulk of this blog article has much more technical and formal language than a human author. We hope you still enjoy it!

Jonathan Carter, CPA, CMA, CPB

What is the Lifetime Capital Gains Exemption?

For Canadian entrepreneurs, farmers, and fishers, selling a business or qualifying property can represent reward for the culmination of years of hard work. 

Understanding the tax implications is necessary, and the Lifetime Capital Gains Exemption (LCGE) is an invaluable tool.

The LCGE allows eligible individuals to significantly reduce, or even eliminate, the capital gains tax payable on the sale of specific types of property. It’s a key provision designed to support growth and investment in Canadian businesses and primary industries.

The CRA defines the LCGE as a cumulative deduction that can be claimed by individuals on capital gains realized from the disposition of two specific types of property:

1. Qualified Small Business Corporation Shares (QSBCS): These are shares of a Canadian-controlled private corporation (CCPC) that meet specific criteria related to active business use and asset composition. 
2. Qualified Farm or Fishing Property (QFFP): This includes land, buildings, fishing boats, and certain quotas and licenses used in a farming or fishing business.

It’s important to remember this is a lifetime limit, meaning you use it cumulatively over your lifetime, not annually.

The Current Exemption Limit

Source:  https://www.canada.ca/en/department-finance/news/2025/01/government-of-canada-announces-deferral-in-implementation-of-change-to-capital-gains-inclusion-rate.html

As of June 25, 2024, the exemption limit stands at $1.25 million for both QSBCS and QFFP. This amount will also be indexed to inflation starting in 2026, ensuring its value keeps pace with economic changes.

A Note on Capital Gains Inclusion Rates: While the LCGE directly reduces your capital gain, it’s essential to understand the overall capital gains inclusion rates. The CRA has announced changes effective January 1, 2026. For individuals, a 50% inclusion rate will apply to the first $250,000 of capital gains realized annually, while a 66.67% inclusion rate will apply to amounts exceeding $250,000. For corporations and trusts, a flat 66.67% inclusion rate will apply. The LCGE helps you reduce the portion of the gain subject to these rates.  This proposed legislation was subsequently abandoned and the capital gain inclusion rate remains at 50% for the time being for individuals, corporations and trusts.

Who Qualifies? 

To claim the LCGE, both the individual and the property must meet specific conditions.

For Individuals:

• You must be a resident of Canada throughout the year the deduction is claimed.
• You must have owned the shares or property for a specific period of time.

For Qualified Small Business Corporation Shares (QSBCS): The CRA outlines several key tests, primarily focused on the corporation’s active business activities:

• Canadian-Controlled Private Corporation (CCPC): It must be a CCPC at the time of disposition.
• Active Business Test (at time of sale): At the time of sale, more than 90% of the fair market value of the corporation’s assets must be used principally in an active business carried on primarily in Canada by the corporation or a related corporation.
• Active Business Test (24-month period): For the 24 months immediately before the disposition, 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.
• Holding Period: The shares must have been owned by the individual (or a related person) for the 24 months immediately before the sale, and no one else can have owned the shares during that period.

For Qualified Farm or Fishing Property (QFFP): The CRA focuses on the property’s use:

• The property must have been used principally in a farming or fishing business by you, your spouse or common-law partner, your parents, or your children.  Leasing out the property to someone else does not qualify.
• Specific ownership and property use conditions, often relating to the period the property was used in the qualifying business, must be met.

How to Claim Your Exemption: CRA Forms You’ll Need

When you’re ready to claim the LCGE, you need to complete specific forms with your income tax return:

• Form T657, Calculation of Capital Gains Deduction: This is the primary form for calculating and claiming your capital gains deduction. It guides you through determining your eligible amount.
• Form T936, Calculation of Cumulative Net Investment Loss (CNIL): Your CNIL can reduce your available capital gains deduction, so this form helps you track and account for any cumulative investment losses.

Your Official Source

The CRA provides comprehensive information on the LCGE. Here are essential resources directly from the Canada.ca website:

• CRA’s “Line 25400 – Capital gains deduction” page: Your starting point for general information and updates.
• CRA Guide T4037, Capital Gains: A detailed publication covering all aspects of capital gains, including extensive sections on the LCGE.
• Forms T657 and T936: Directly accessible from the CRA website for download and instructions.

Don’t Leave Money on the Table! Seek Professional Guidance

The LCGE can still be complicated—especially for businesses. Things like cleaning up corporate assets or understanding how it works with the new Canadian Entrepreneurs’ Incentive (starting in 2025) often require expert help.

The CRA itself encourages taxpayers to seek professional advice when dealing with complex tax matters. A qualified tax advisor or accountant can help you:

• Confirm your eligibility based on the CRA’s stringent criteria.
• Strategize to maximize your exemption.
• Ensure all necessary forms are correctly completed and filed.
• Look out for anything that might make you owe the Alternative Minimum Tax (AMT)

Are you a Canadian business owner, farmer, or fisher considering the sale of a qualifying property? You could benefit from significant tax savings through the Lifetime Capital Gains Exemption.  The key is, plan your exit!

Reach out to KATA Accounting to learn how this opportunity can support your long-term financial goals. Click here: Contact Us!