Lifetime capital gains exemption (LCGE)

The LCGE is the single largest reason Canadian sellers care about deal structure. Because it attaches to qualifying shares, a seller who accepts an asset sale generally gives it up — which can be worth more than several points of purchase price.

What "qualifying" means

Shares do not qualify automatically. The tests are detailed and they look backwards over time, not just at the closing date — covering what the corporation does, what proportion of its assets are used in an active business in Canada, and how long the shares have been held and by whom. A company that has accumulated surplus cash or passive investments can fail on the asset tests even though the operating business itself is healthy.

Why planning happens years ahead

• Purification — moving non-active assets out of the company — takes time and has its own tax consequences
• Some tests look back over a period before the sale, so last-minute changes may not help
• The exemption is per individual, so how shares are held across a family can change the total sheltered
• The alternative minimum tax can affect what is actually received in the year of sale