Encyclopedia
Capital gains / Lifetime Capital Gains Exemption (LCGE)
It can shelter part of the gain when you sell qualifying small business shares (not assets), and your accountant confirms whether you qualify. A capital gain is the profit on selling capital property.
For example: A business owner planning a share sale asks an accountant early whether the company's shares could qualify for the exemption. (Illustration only, not a real deal.)
The Canada Revenue Agency (CRA) handles federal tax. Official source: CRA: capital gains deduction
Example only, not a real client. Say you are planning to sell the shares of your operating company in a couple of years. You sit down with your accountant early to see whether the shares could qualify for the lifetime capital gains exemption, and what would need to change in the company before a buyer shows up.
What I’d tell a friend
Do not assume a rental building or a company that mostly holds passive real estate will qualify. Ask an accountant years ahead of a share sale, not the week you list.
Why it matters to you
Tax can be one of the biggest costs of selling. Planning ahead may help you reduce it, and some small business owners may qualify for the lifetime capital gains exemption on shares, but only if the business and the shares meet the conditions. As of this writing, half of a capital gain is generally taxable, and CRA lists the lifetime exemption at $1,275,000 for 2026 for qualifying property. Confirm current figures with your accountant.
How to use it in your deal
Owners planning a sale should talk to an accountant early, since structure matters: share sale or asset sale, timing, and whether the company qualifies. Keep records of purchase price, improvements and costs, which affect the adjusted cost base.
Rental buildings usually produce capital gains plus recapture of capital cost allowance. As of this writing the inclusion rate is generally one-half (a proposed hike was cancelled in March 2025), and CRA's indexation table lists the lifetime exemption at $1,250,000 for 2025 and $1,275,000 for 2026 for qualifying property. Check CRA and your accountant rather than relying on old articles. Buyers of shares should know the seller's tax preferences can drive the deal.
Tax-deferred rollover to a company and other planning can defer tax. Don't make decisions from rules of thumb; get advice on your facts. A company that holds mostly passive assets like rental buildings may fail the qualifying tests, and fixing that can take time before a sale, so start planning a couple of years out.
Mistakes I see
Assuming real estate qualifies for LCGE. Poor cost records. Relying on outdated rates.
In BC and Vancouver
Federal income tax rules and CRA guidance explain capital gains and the lifetime exemption. BC has no 1031-style deferral on a regular sale of investment property.
Official sources: CRA: capital gains deduction · CRA: indexed amounts (includes LCGE) · Prime Minister's Office: inclusion rate hike cancelled (March 21, 2025) · CRA Guide T4037: Capital gains
What it is
A capital gain is, in plain terms, the profit on selling a capital property for more than its adjusted cost base, after selling costs. In Canada, only part of that gain is included in income. That share is called the inclusion rate.
The LCGE can shelter eligible gains on qualified small business corporation shares and on qualified farm or fishing property, up to a lifetime limit. Ordinary investment real estate generally does not qualify on its own.
Current figures (check canada.ca)
As of this writing, half of a capital gain is generally included in income. A proposed increase in that inclusion rate was cancelled by the federal government in March 2025, but tax rules change, so confirm the current rate with your accountant before you price a sale.
CRA’s indexation table lists the lifetime capital gains exemption at $1,250,000 for 2025 and $1,275,000 for 2026 for qualifying property, which means a maximum capital gains deduction of $625,000 and $637,500 in those years when half the gain is taxable. Limits are lifetime and conditions are strict.
How sellers use it in a deal
Share sales and asset sales are taxed differently. A company that holds mostly rental buildings may fail the active-business tests for the exemption, and fixing that can take years.
Keep records of what you paid, what you spent on improvements, and capital cost allowance claimed. On real estate, expect capital gains plus possible recapture. There is no 1031-style exchange in Canada, so plan the tax before you accept an offer.
Questions to ask before you sign
- Is this a capital gain?
- Does LCGE apply?
- What's my adjusted cost base?
- Should I sell shares or assets?
Keep reading
Related terms: Share sale, Asset sale
- Is there a 1031 exchange in Canada? What BC owners can look at instead
- Selling a business that owns or leases its real estate in BC
- Asset sale or share sale for a BC business in 2027
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General information for British Columbia only. It isn’t legal, tax, accounting or financial advice, laws and rates change, and reading it doesn’t make you my client. Any numbers or scenarios are hypothetical. Check the linked official source and talk to a lawyer, accountant or other qualified professional before you act or sign anything. See the terms and disclaimer.