The lifetime capital gains exemption (LCGE) is an $800,000 deduction that can be claimed against capital gains on the disposal of qualified property.
Qualified properties include:
- qualified small business corporation share,
- qualified farm property
- qualified fishing property.
In order for your company’s shares to be considered qualified small business corporation shares, the following criteria must be met:
- The shares must have been owned by the individual or related person for the past 24 months prior to the disposition.
- More than 50% of the fair market value of the assets of the corporation must have been used in an active business in Canada for the past 24 months before the disposition.
- At the time of disposition of the shares, at least 90% of the fair market value of the assets must be used in the active business.
Some examples of assets that may not qualify as being used in an active business are rental properties, stocks, other investments. The basic rule is to ensure that all non-active assets are held outside of your active business (perhaps in a holding company) to avoid issues.
The maximum lifetime capital gain exemption that can be claimed is $800,000. This was increased from $750,000 for 2014. Since capital gains are taxed at 50%, the maximum deduction is $400,000. The deduction is also reduced by your cumulative net investment loss (CNIL). This is the amount by which the total investment expenses and losses exceeds the total investment gains for all years (after 1987).
Make sure to consult your Canadian income tax practitioner before making a sale of small business shares to determine if you qualify for the lifetime capital gain exemption. To learn more about this feel free to book a free consultation with us.