What does the lifetime capital gains exemption (LCGE) allow, and how much is it?

What is the lifetime capital gains exemption? The Canada Revenue Agency says that if you have a capital gain on the sale of certain properties, you may be eligible for the lifetime capital gains deduction, which it describes as half of the lifetime capital gains exemption. The exemption applies to particular kinds of property, not to every gain, and each one has conditions.

What it covers

The CRA lists dispositions of qualified small business corporation shares and of qualified farm or fishing property among the properties covered. When an owner sells the company’s shares, the shares are the property in question. The Income Tax Act defines a qualified small business corporation share in subsection 110.6(1), so the Act, not a general description, decides whether yours count. See whether your shares qualify.

The tests behind the shares

Under that definition the share must be of a small business corporation owned by the individual, the individual’s spouse or common-law partner or a related partnership, and the corporation must be a Canadian-controlled private corporation. The Act also requires that, throughout the preceding 24 months, the share was not owned by anyone other than the individual or a related person or partnership, and that the corporation met an asset test, subject to the rules for substituted shares and the other exceptions in the definition. Read subsection 110.6(1) or have an accountant apply it to your facts.

How much it is

The amount is fixed by law and has changed over time, so it is not quoted here. The CRA publishes the current limit on its capital gains deduction page and says the limit is indexed to inflation using Consumer Price Index data reported by Statistics Canada. It directs taxpayers to Form T657, Calculation of Capital Gains Deduction, to work out the deduction. The Canadian Federation of Independent Business calls the exemption one of its founding victories and reports on the announced increase to the limit.

Shares are not the only structure

If the sale is of assets rather than shares, the analysis is different. That question is covered in selling assets instead of shares.