Selling Company Shares and the Lifetime Capital Gains Exemption: What to Check First

If you own shares in an incorporated Canadian business, the lifetime capital gains exemption may shelter much of the gain when you sell them. The limit is $1.25 million for sales after June 24, 2024, and the Canada Revenue Agency lists $1,275,000 for 2026 now that indexation has resumed.

The exemption is not automatic. Your shares must meet tests at the time of sale and over the 24 months before it, and the structure of the deal decides whether the exemption is available at all. That is why the review should start well before you sign anything.

What the exemption is and what it is worth

The lifetime capital gains exemption, often called the LCGE, lets an individual who was resident in Canada throughout the year deduct capital gains on the sale of qualified small business corporation shares, up to a lifetime limit (Income Tax Act, s 110.6(2.1)).

The Act expresses the limit as a deduction of $625,000 of taxable capital gains. Because half of a capital gain is taxable, that equals $1.25 million of gain. That amount applies to sales on or after June 25, 2024, and is indexed to inflation for taxation years beginning after 2025 (s 117.1(2)(c)). The Canada Revenue Agency's indexation table shows an exemption limit of $1,275,000 for 2026.

In March 2025 the federal government cancelled the proposed increase in the capital gains inclusion rate and said it would keep the higher LCGE limit, so the one-half inclusion rate continues to apply.

The tests your shares must pass

A share is a qualified small business corporation share only if all of the following are met (s 110.6(1) and s 248(1)):

• At the time of sale: the company is a Canadian-controlled private corporation, and all or substantially all of the fair market value of its assets is attributable to assets used principally in an active business carried on primarily in Canada, or to shares or debt of connected small business corporations.
• Holding period: throughout the 24 months before the sale, the shares were not owned by anyone other than you or a person or partnership related to you.
• Asset test over 24 months: throughout that period, more than 50% of the fair market value of the company's assets was attributable to active business assets (or qualifying shares or debt of connected corporations).

These tests look backward. A problem that existed 18 months ago can still disqualify a sale today, and it often cannot be fixed at the last minute.

Common reasons a sale does not qualify

• Surplus cash and investments. Retained earnings parked in the company as cash, term deposits or a portfolio count against the asset tests. Moving them out before a sale, often called purifying, has its own tax consequences and needs to be planned with the 24-month tests in mind.
• An asset sale instead of a share sale. The exemption applies to shares. Buyers often prefer to buy assets, which leaves the gain inside your company. Our article on share purchase or asset purchase explains why each side prefers what it does.
• A holding company sells. The exemption is claimed by individuals. If your holding company owns the operating company's shares and the holding company is the seller, it cannot claim it.
• Questions about control. The company must be a Canadian-controlled private corporation. Control by non-residents or by a public corporation can affect that status, so confirm it with your accountant.
• Less room than you think. Past exemption claims reduce what is left, and the Act's cumulative gains limit and annual gains limit can reduce the deduction in a particular year. Your accountant can confirm your actual room.

Planning points to raise early

• More than one exemption. Each individual has a separate lifetime limit. Where family members own shares directly, or through a properly structured family trust, more than one exemption may be available. This needs advice well before a sale because of the 24-month holding test and the rules on income splitting.
• Minimum tax. For alternative minimum tax, the Act recognises only part of the exemption deduction (s 127.52), so a large exempt gain can still produce minimum tax in the year of sale. Have your accountant model it.
• Payment terms. Holdbacks, earn-outs and vendor financing affect when proceeds arrive and how the gain is reported. Tie the purchase agreement's payment terms to the tax plan.
• Clean records. The holding test depends on who owned the shares and since when. Gaps in the minute book or share register can be hard to explain in a buyer's due diligence or a CRA review.

Who does what: your lawyer and your accountant

Your accountant confirms whether the shares qualify, calculates the exemption room, and models minimum tax and the after-tax result of different structures. Your lawyer handles the legal side: correcting the corporate records, carrying out any reorganisation such as share exchanges, issuing shares or setting up a trust, and negotiating the share purchase agreement so the deal stays a share sale with sensible payment terms.

The two reviews are most useful when done together and early, ideally a couple of years before a planned exit. If you are at the start of that process, our guides to selling your business in BC and preparing your business for sale set out the wider steps.

Planning a share sale? Start the exemption review before you sign

Our business purchase and sale lawyers can review your corporate records and share history, work with your accountant on any pre-sale reorganisation, and negotiate the share purchase agreement.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.