Lifetime Capital Gains Exemption for Small Business Shares: Do Your Shares Qualify?

Prepared by Toronto Tax & Accounting Solutions Inc. and reviewed by Behroz Rizvi, owner. General information only; selling a business needs advice for your own facts.

If you own shares of a small Canadian company and sell them at a gain, a federal deduction may let you keep a large part of that gain tax-free. It is called the lifetime capital gains exemption (LCGE), and it applies only to qualified small business corporation (QSBC) shares. The limit is $1.25 million of capital gains, which works out to a $625,000 deduction because only half of a capital gain is taxable. The limit is indexed to inflation, so confirm the current figure with the CRA before you act.

The short answer

• It applies to shares of a qualifying small business corporation, not to the assets of an unincorporated business and not to most rental or investment holdings.
• You must be a Canadian resident for the year of sale.
• It is a lifetime limit per individual, so a spouse who owns shares can claim their own.
• You calculate it on form T657 and claim it on line 25400 of your return.

The tests your shares must pass

1. Canadian-controlled private corporation (CCPC): the company must be a CCPC for the 24 months before the sale.
2. 24-month ownership: for the 24 months before the sale, nobody other than you, a related person or a partnership you belong to owned the shares. Newly issued shares have special rules.
3. 50% test: throughout those 24 months, more than 50% of the fair market value of the company’s assets was used mainly in an active business carried on primarily in Canada (shares or debt of connected corporations can count too).
4. 90% test at the moment of sale: at the time of sale, all or substantially all of the assets (90% in the CRA’s view) must be used in an active business.

Where owners get caught

• Excess cash and investments inside the company at the sale date can fail the 90% test. Owners often clear this up beforehand, which takes planning and time.
• Holding companies and family trusts make the 24-month and 50% tests harder to see. Ownership structure should be reviewed early.
• Selling assets instead of shares. The exemption applies to shares. A buyer who wants assets can cost you the exemption.
• Earlier claims. Any previous use of the exemption reduces what is left.
• Alternative minimum tax can affect large claims, so model the full return before closing.

A simple illustration

Say an Ontario owner sells all the shares of a qualifying corporation for a $900,000 gain and has never used the exemption. The gain sits within the $1.25 million limit, so the taxable half is covered by a capital gains deduction. If the gain were $1.6 million instead, the first $1.25 million is sheltered and the remaining $350,000 is taxed as a capital gain, with half of it included in income. This is an illustration only. Real results depend on your facts, alternative minimum tax and earlier claims.

What to do well before a sale

• Confirm the company is a CCPC and list everything it owns.
• Look at surplus cash and passive investments held inside the company.
• Review who owns the shares, and whether a spouse or family member can use their own exemption.
• Get financial statements and corporate tax filings up to date.
• Talk to us before you sign a letter of intent.

Common questions about the lifetime capital gains exemption

Is the exemption available on a sole proprietorship?

No. It is for shares. A sole proprietor who incorporates and later sells shares may qualify, subject to the tests. See sole proprietorship vs corporation in Ontario for the bigger picture.

Does it apply to rental property?

Generally no. Passive rental activity is not an active business for these tests.

Is the $1.25 million a gain or a deduction?

The limit is on the gain. The deduction you actually claim is 50% of it.

Do I file anything to claim it?

Yes. Complete form T657 and claim the result on line 25400 of your return.

How we can help

We prepare corporate T2 returns from $499 before HST and keep corporate records in shape so a future sale is cleaner. See our corporate tax page and our guide to Ontario corporate tax rates, or book a free consultation or call (437) 410-7999 if a sale is on the horizon. We are a CRA-authorized EFILE filer, not a CPA firm, and we will tell you plainly if your situation needs a lawyer or a transaction review by a CPA.

Sources

• Canada Revenue Agency: T4037 Capital gains

Last reviewed: October 19, 2026. This article is general information, not advice for a specific business.