Claiming the Lifetime Capital Gains Exemption (LCGE)

One of the more generous aspects of Canadian taxation is the Lifetime Capital Gains Exemption (LCGE). As of June 2024, if you sold Qualified Small Business Corporation Shares (QSBCS), your gains may be eligible for the $1,250,000 exemption. However, you need to submit the appropriate form and documentation, as the exemption isn’t automatic. 

What is the Lifetime Capital Gains Exemption?

The Lifetime Capital Gains Exemption (LCGE) is a valuable tax benefit that allows eligible Canadians to reduce or even eliminate tax on capital gains realized from the sale of qualified property. Most commonly, it applies to the sale of qualified small business corporation shares and certain types of farm or fishing property. Up to a set lifetime limit (which is indexed to inflation and may change each year), eligible individuals can claim the exemption to shelter all or part of their capital gain from tax. This can result in significant tax savings for business owners, farmers, and fishers when they sell or transfer their business, helping them keep more of the proceeds for retirement or reinvestment.

How does the Lifetime Capital Gains Exemption work?

The Lifetime Capital Gains Exemption (LCGE) works by allowing eligible Canadians to deduct all or part of a capital gain realized on the sale of qualified property—most commonly qualified small business corporation shares or certain farm or fishing property. When you sell one of these assets, you calculate your capital gain by subtracting your adjusted cost base and any selling expenses from the sale price. Normally, 50% of that gain is taxable, but if the property qualifies, you can claim the LCGE to reduce or eliminate the taxable portion, up to your available lifetime limit. Any amount you’ve previously claimed reduces your remaining exemption room, and the limit is indexed to inflation.

Qualifying Property

There are three types of property that can give rise to the capital gains exemption:

• The first is the sale of Qualified Small Business Corporation shares. These are shares in a private company that operates an active business and is owned, in the majority, by Canadians. You or someone related to you must have owned the shares for at least 24 months. Keep in mind that shares of publicly listed companies or mutual funds are not eligible.
• The second qualifying property is Qualified Farm Property. This property type includes buildings, land, and milk and egg quotas that are used in a farming enterprise. If the farm is operated through a company, the shares of that company also qualify.
• Finally, the third type of property that qualifies for the exemption is Qualified Fishing Property, which includes real estate, fishing vessels, and fishing licenses. Here also, if the fishing business is operated through a company, the shares of the company qualify for the exemption.

Amount of Exemption

Qualified Small Business Corporation Shares

As of June 2024, the exemption for Qualified Small Business Corporation shares is $1,250,000 but this amount is indexed annually to match the official rate of inflation as published by Statistics Canada.

The exemption is a lifetime cumulative exemption. This means that you can claim any part of it at any time in your life if you dispose of qualifying property. You do not have to claim the entire amount at once. For example, if you sold shares of a small company, say, two years ago and claimed $100,000 of exemption, you still have $700,000 available to claim.

Qualified Farm and Fishing Property

If you owned a property used in a farming or fishing business for over two years before you sell it, and continue to use it regularly, you might be able to use your capital gains exemption against the sale. However, the income earned from your farming or fishing business must be greater than any income that you earned from other sources. 

Capital Gains Deduction in Quebec

Quebec also allows capital gains deductions on resource property, which can be completed using form Tp-726.20.2-V.

Claiming the Exemption

If you owned a property used in a farming or fishing business for over two years before you sell it, and continue to use it regularly, you might be able to use your capital gains exemption against the sale. However, the income earned from your farming or fishing business must be greater than any income that you earned from other sources. 

To do so, you will need to know your:

• Proceeds of Disposition — The proceeds of disposition is the price you sold the property for, plus any fees associated with the sale.
• Adjusted Cost Base — The adjusted cost base is the price you paid for it plus any capital improvements that you made.

You will also need to know what portion, if any, of the exemption you may have used in the past. If you don’t know this information, you can contact the CRA and they will be able to provide this information. It can also be found on your CRA’s My Account online.

References & Resources