Lifetime Capital Gains Exemption for Business Owners

Introduction
Understanding the Lifetime Capital Gains Exemption for business owners is one of the most important tax planning strategies available to Canadian entrepreneurs. The LCGE allows eligible business owners to sell their company and potentially shelter more than $1 million in capital gains from tax. This exemption can transform a business sale, turning decades of hard work into a tax-efficient exit. However, LCGE Canada rules are highly technical, and many business owners discover too late that their shares do not qualify. Québec business owners must also meet provincial criteria, adding an additional layer of complexity. This guide explains how the Lifetime Capital Gains Exemption for business owners works, who qualifies, how to prepare years in advance, and how to avoid common pitfalls that jeopardize eligibility.

Legal and Regulatory Framework
The Lifetime Capital Gains Exemption for business owners is governed by section 110.6 of the Income Tax Act and Québec’s parallel provisions. The LCGE applies to two types of property:

• Qualifying Small Business Corporation (QSBC) shares
• Qualified farm or fishing property

For business owners selling a corporation, QSBC shares must meet strict conditions:

1. At the time of sale, at least 90 percent of the company’s assets must be used in an active business carried on in Canada.

2. For the 24 months before the sale, at least 50 percent of the corporation’s assets must have been used in active business activities.

3. The shares must not be owned by anyone other than the seller or related persons during that 24-month period.

The LCGE is indexed annually. Business owners who qualify may shelter over $1,000,000 in capital gains from federal tax. Québec residents apply provincial LCGE rules separately but generally parallel federal eligibility with some differences in active asset testing and provincial adjustments.

Selling shares, not assets, is essential. LCGE does not apply to asset sales. Understanding Lifetime Capital Gains Exemption for business owners rules early allows proper “purification” of the corporation to ensure eligibility well before a sale.

Key Court Decisions
Courts have issued numerous rulings related to the Lifetime Capital Gains Exemption for business owners. Key themes include:

• Purification failures — Courts denied LCGE claims where passive assets such as excess cash, investments or real estate prevented meeting the 90-percent asset-use test.
• Holding companies — Cases confirmed that indirect asset tests through holding companies must also meet QSBC rules.
• Active vs passive business — Courts evaluated whether revenue sources constituted active business; rental income or investment portfolios often failed.
• Share ownership during the 24-month test — LCGE was denied when shares were not held exclusively by the seller or related persons during the required period.
• Goodwill valuation — Courts confirmed goodwill is an active business asset, allowing businesses with minimal physical assets to qualify.

Québec rulings reinforced similar requirements and emphasized strict documentation and valuation for LCGE claims. These decisions prove that Lifetime Capital Gains Exemption for business owners requires meticulous preparation.

Why CRA Targets This Issue
CRA heavily scrutinizes LCGE claims because they involve large tax-free amounts. Red flags include:

• companies with significant passive assets
• recent corporate reorganizations
• holding companies with mixed assets
• real estate or rental operations claiming to be active businesses
• missing or inaccurate share registers
• asset transfers close to the sale date
• related-party sales with improperly documented FMV values

CRA auditors verify balance sheets, corporate structures, minute books, valuation reports, bank accounts and historical operations. Québec performs its own review for CO-17 filings. Because Lifetime Capital Gains Exemption for business owners eliminates large capital gains taxes, CRA enforcement is strict.

Mackisen Strategy
Mackisen CPA provides a full, structured and proactive approach to securing the Lifetime Capital Gains Exemption for business owners. Our strategy includes:

• Full LCGE eligibility analysis — active asset testing, shareholder review, related-party analysis
• Corporate purification — removing passive assets such as excess cash, investments or unused property
• Holding company structuring — reorganizing shares to meet QSBC thresholds
• 24-month preparation timeline — ensuring compliance long before a sale
• Capital gains planning — modelling tax outcomes under various sale scenarios
• Valuation reports — ensuring goodwill and assets meet fair market value requirements
• Transaction structuring — guiding sellers toward share sales, not asset sales
• LCGE maximization — using spousal and family trust planning to multiply the exemption where eligible
• Full CRA and Revenu Québec documentation preparation

Our goal is to ensure business owners fully maximize Lifetime Capital Gains Exemption for business owners while remaining compliant and audit-proof.

Real Client Experience
Many business owners come to Mackisen unaware that they risk losing the LCGE. One client accumulated large passive investments inside the corporation, unintentionally disqualifying QSBC status. Mackisen purified the company—moving passive assets to a holding company—and restored eligibility in time for a multi-million-dollar sale.

Another client attempted to sell assets instead of shares. We restructured the transaction into a share sale, enabling the seller to claim the LCGE and save over $800,000 in taxes.

A Québec entrepreneur owned shares for only 18 months before selling. LCGE would have been denied. We postponed the sale until the 24-month rule was met, saving the seller a significant tax amount.

Another seller had improperly documented share ownership. Mackisen reconstructed minute books, corrected registers and preserved LCGE qualification. These cases show how critical early planning is for Lifetime Capital Gains Exemption for business owners.

Common Questions
Business owners frequently ask:

• Does every incorporated business qualify?
No—only QSBC shares with strict active-asset rules.

• Can I multiply the LCGE with family members?
Yes, through share ownership or family trusts, if structured properly.

• Does LCGE apply to asset sales?
No—it only applies to share sales.

• Can passive investments disqualify me?
Yes—excess passive assets are one of the biggest LCGE killers.

• If my corporation owns real estate, do I qualify?
It depends—rental income is generally passive unless connected to an active business.

• Does Québec have different rules?
Québec follows similar principles but requires separate provincial evaluation.

Understanding these points helps business owners prepare Lifetime Capital Gains Exemption for business owners strategies correctly.

Why Mackisen
With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps businesses stay compliant while recovering the taxes they’re entitled to. Whether you’re filing your first GST/QST return or optimizing multi-year refunds, our expert team ensures precision, transparency and protection from audit risk. When planning for the Lifetime Capital Gains Exemption for business owners, Mackisen provides full eligibility analysis, corporate purification, LCGE maximization and complete transaction support to help business owners secure tax-free wealth efficiently and confidently.