|

Lifetime Capital Gains Exemption Increased to .25M: Complete Guide

Bymanager

Introduction

In 2026 the Canadian government announced a significant increase to the Lifetime Capital Gains Exemption (LCGE) for qualified small business corporation shares and qualified farm business shares. The new threshold of $1.25 million – up from the previous $900,000 – offers Canadian entrepreneurs a powerful tax planning tool. This article explains the rule change, eligibility requirements, and practical steps businesses can take to optimize the exemption.

What is the LCGE?

The LCGE allows a tax-paying Canadian to exclude a portion of the capital gain realized on the sale of qualifying shares from income tax. Historically, this exemption has been a cornerstone of succession planning and wealth accumulation for small-business owners. The 2026 change means you can shelter a larger portion of the gain, reducing the overall tax burden.

Eligibility Criteria

1. Qualified Shares

  • Small Business Corporation Shares (SBCS): Shares of a corporation that meets the definition of a qualified small business corporation (QSBC). Key tests include:
  • Canadian-owned: 100% owned by Canadian residents.
  • Business Asset Test: 50% of the corporation’s assets used in a qualifying business.
  • Gross Income Test: $5 million or less in gross revenue for the tax year.
  • Qualified Farm Business Shares (QFBS): Shares of a farming corporation meeting the farm business asset and income tests.

2. Holding Period

  • Minimum 24-month period: The shares must be held for at least 24 months before disposition.
  • Continuity of ownership: No more than 33% of the corporation’s shares may be owned by non-Canadian residents or a corporation that is not a Canadian resident during the holding period.

3. Sale Conditions

  • The sale must be in a public or private transaction, but the price must be determined through an accepted valuation method.
  • The transaction must be reported on a T1 tax return and filed within the deadline.

Calculating the Exemption

The exemption is calculated by taking the lesser of:

  1. $1.25 million (new threshold) or
  2. The actual capital gain realized on the sale.

If your capital gain is below $1.25 million, the entire gain is exempt. If it exceeds the threshold, only $1.25 million is exempt, and the excess is taxed at the applicable capital gains rate.

Practical Steps to Maximize LCGE

  1. Review Your Share Structure – Ensure that your corporation still qualifies as a QSBC or QFBS. If your revenue exceeds $5 million, consider a restructuring or a new corporation.
  2. Track Holding Periods – Maintain meticulous records of acquisition dates. A simple spreadsheet or accounting software can flag potential lapses.
  3. Plan Your Exit – Coordinate with a tax advisor to time the sale during a low-income year or combine it with other tax-deferral strategies.
  4. Valuation Matters – Obtain an independent valuation to support the sale price. CRA may challenge the exemption if the valuation is not credible.
  5. Consider a Qualified Capital Gains Exemption Agreement – This legal arrangement can help protect the exemption across multiple parties or over successive sales.

Case Study: MapleTech Inc.

MapleTech, a 4-year-old software firm, earned $4 million in 2025 and sold 60% of its shares in 2026 for $1.2 million. Because the company met all QSBC criteria, the entire $1.2 million gain was exempt under the new $1.25 million threshold. MapleTech saved approximately $300k in taxes, allowing the founders to reinvest in R&D.

Common Pitfalls

  • Non-Canadian Residents: Even a 10% foreign ownership can invalidate the exemption. Regularly audit share ownership.
  • Failing the Holding Period: The 24-month rule is strict. If you sell before the period, you lose the exemption entirely.
  • Mis-valued Shares: CRA will disallow the exemption if the sale price is not justified. Always use a qualified appraiser.

Call to Action

Ready to leverage the new LCGE threshold? Schedule a free consultation with Bader A. Chowdry, CPA, CA, LPA today. Let us audit your corporation’s eligibility and design a tax-efficient exit strategy.

Internal Resources

Related Resources

Important — informational only, not advice. Do not use this article to make any decision.

This article is published by Insight Accounting CPA Professional Corporation for general educational purposes only. It is not tax, legal, accounting, financial, or investment advice, and nothing in this article should be relied upon — by anyone, for any purpose — to make a business, tax, financial, accounting, legal, or investment decision.

Tax law, CRA administrative positions, court interpretations, and Ontario provincial rules change frequently, sometimes retroactively, and the content of this article may be incomplete, simplified, out of date, or wrong by the time you read it. The right answer for your specific situation depends on facts this article does not know — your structure, history, jurisdiction, filings, contracts, and goals.

Before acting, engage your own Chartered Professional Accountant or qualified advisor who has reviewed your specific circumstances in writing. Insight Accounting CPA Professional Corporation, the author, and any contributors expressly disclaim all liability — direct, indirect, or consequential — for any action taken or not taken on the basis of this content.

Insight Accounting CPA Professional Corporation is led by Bader A. Chowdry, CPA, CA, LPA — licensed by CPA Ontario under the Public Accounting Act, 2004. To engage us for situation-specific advice, book a free 30-minute discovery call.

Similar Posts