Lifetime Capital Gains Exemption (LCGE): Save Tax When You Sell Your Small Business – A Complete Guide by a Montreal CPA Firm Near You

The Lifetime Capital Gains Exemption (LCGE) is one of the most valuable tax benefits
available to Canadian entrepreneurs. It allows eligible business owners to sell their
shares and shelter over $1,000,000 in capital gains tax-free, resulting in life-changing
savings. Yet, despite its value, many owners misunderstand the rules, wait too long to
prepare, or fail to structure their corporation to meet the QSBC (Qualified Small
Business Corporation) criteria. Errors can lead to CRA denying the exemption, resulting
in massive unexpected tax bills at the worst possible time—during a business sale.
Understanding the LCGE in Canada is essential for succession planning, retirement
planning, family transitions, and maximizing after-tax proceeds when selling your
business. This guide explains LCGE eligibility, QSBC rules, purification strategies, CRA
audit issues, and key planning steps every business owner must take in advance.
Legal and Regulatory Framework
The LCGE is governed by section 110.6 of the Income Tax Act. It allows individuals to
claim a deduction on capital gains arising from the sale of:
• Qualified Small Business Corporation (QSBC) shares,
• Qualified farm property,
• Qualified fishing property.
For QSBC shares, the LCGE rules require:

1. Small Business Corporation Test (at time of sale)

At least 90% of the corporation’s assets must be used in an active business
carried on in Canada. Passive investments generally disqualify shares unless
removed prior to sale.
2. Holding Period Test (24-month rule)
Shares must have been held by the seller or a related person for at least 24
months before the sale.
3. 50% Active Asset Test (for the previous 24 months)
Throughout the 24 months before sale, the corporation must have used more
than 50% of its assets in an active Canadian business.
The current LCGE limit exceeds $1,016,836 and is indexed annually. Only individuals
(not corporations) can claim the exemption. These rules create the structure for claiming
the Lifetime Capital Gains Exemption in Canada.
Key Court Decisions
Several court decisions highlight the strict interpretation of LCGE rules.
In Triad Gestco Ltd. v. Canada, CRA successfully denied LCGE because the
corporation held too many passive investments, failing the active asset test.
In Gillard v. The Queen, corporate purification done shortly before the sale was
insufficient because the corporation still held passive assets indirectly.
In Mancuso v. Canada, the court confirmed that goodwill is an active business asset
and can help meet QSBC thresholds.
In Kostas v. The Queen, shares held for less than 24 months failed the holding-period
test even though the business itself was long established.
These decisions show that LCGE qualification requires proactive planning—not last-
minute adjustments.
Why CRA Targets This Issue
CRA heavily scrutinizes LCGE claims because they can eliminate over a million dollars
in taxable capital gains. CRA focuses on:
• corporations with large passive investment portfolios
• related corporations holding assets that affect the active asset test
• attempts to multiply the LCGE among family members using trusts
• purification efforts done too late or improperly
• incorrect classification of goodwill and other intangible assets
• shares transferred shortly before a sale to claim exemption
• shareholders who are not genuinely active in the business
CRA frequently requests detailed documentation when LCGE is claimed, including
asset lists, financial statements, goodwill valuations, and corporate structures over the

prior 24 months. Understanding these issues is essential when planning to use the
Lifetime Capital Gains Exemption in Canada.
Mackisen Strategy
At Mackisen CPA Montreal, we ensure corporations fully qualify for the LCGE through
meticulous planning years before a sale. Our strategy includes:
• evaluating QSBC status and identifying risks early
• performing corporate purification, removing passive assets or investments
• restructuring corporate share classes to enable LCGE multiplication (when compliant
with CRA rules)
• valuing goodwill, intellectual property, shares, and active business assets
• building documentation to support the active asset test for the past 24 months
• planning pre-sale rollovers or reorganizations using Section 85 or estate freezes
• coordinating with lawyers, valuators, and business brokers to structure a tax-efficient
sale
With proper preparation, we help business owners save hundreds of thousands—or
millions—in tax using the LCGE.
Real Client Experience
A client selling a profitable service business expected to claim the LCGE but held
excess cash and investments in the corporation. We performed a purification by moving
passive assets into a holding company and restructured the corporation, successfully
restoring QSBC status.
Another client transferred shares to family members one month before a sale to multiply
the LCGE. CRA denied the claims due to the 24-month rule. We negotiated a partial
settlement and implemented a compliant long-term structure for future planning.
In a third case, a business owner underestimated the value of goodwill. We performed a
formal valuation, which significantly increased the tax-free portion of the sale under
LCGE rules. These examples demonstrate how professional LCGE planning prevents
costly mistakes.
Common Questions
Business owners often ask whether their corporation automatically qualifies. It does
not—QSBC tests must be met.
Others ask whether passive investments disqualify shares. They can unless purified
properly and early.
Some ask whether LCGE applies to the sale of business assets. No—the LCGE
applies to shares, not asset sales.
Another question is whether LCGE can be multiplied among spouses or adult children.
Yes, through proper structures such as family trusts, but CRA aggressively audits these.

These questions show why understanding the Lifetime Capital Gains Exemption in
Canada is crucial before selling a business.
Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps
entrepreneurs protect their wealth by structuring business sales to qualify for the LCGE.
Whether you are preparing for a sale, considering succession, or planning long-term tax
strategies, our expert team ensures precision, transparency, and protection from audit
risk.