If you’re thinking about selling your business, you may be able to save a significant amount of tax by claiming the lifetime capital gains exemption (LCGE) on the sale if you’re selling the shares of an incorporated business that are qualified small business corporation (QSBC) shares. This article describes how you may qualify for the LCGE and some of the factors you may need to consider when claiming the LCGE.

 

What is the LCGE?

The LCGE reduces or eliminates the taxable capital gains realized on the disposition of certain eligible property. Individuals who are resident in Canada may qualify for the LCGE on the disposition of QSBC shares. The 2024 budget increased the LCGE from $1,016,836 to $1,250,000 for dispositions that occur on or after June 25, 2024. The LCGE will resume indexation in 2026.

 

To provide you with an idea of what the tax savings could be when you claim the LCGE, assume you sell the shares of your incorporated business on or after June 25, 2024, and can use an LCGE amount of $1.25 million against the capital gains realized. If your marginal tax rate is 50%, you can potentially save about $400,000 in taxes by using the LCGE.

 

You may also be able to claim the LCGE when you dispose of a qualified farm or fishing property. For more information on the LCGE when selling a farm, please ask an RBC advisor for the article on this topic.

 

When can you use the LCGE?

Aside from a simple sale of the shares of your corporation, below are some of the situations where you may use the LCGE: • You implement an estate freeze of your business. An estate freeze may allow you to transfer the future growth of the company to other shareholders, usually family members. During the freeze, you may be able to crystallize the LCGE and increase the ACB of your shares on a tax-deferred basis. Ask an RBC advisor for the article on estate freezes for more details;

• You transfer the shares of your business to other family members; 
• Your corporation is taken over by way of a share purchase or a merger with another Canadian or foreign corporation; 
• On your death, capital gains are realized on the deemed disposition of the shares of your business; or 
• You sell certain other types of property, such as a farming or fishing property

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