Lifetime Capital Gains Exemption (LCGE) for Corporations in Canada
If you own a Corporation in Canada, you may be eligible for the Lifetime Capital Gains Exemption (LCGE) when selling shares of the corporation. However, strict conditions must be met.
1. LCGE Limit (2024 and Beyond)
As of June 25, 2024, the LCGE limit for the sale of qualifying small business shares is $1.25 million.
This exemption allows eligible shareholders to shelter up to $1.25 million in capital gains from taxation when selling shares of a qualifying corporation.
The capital gains inclusion rate remains at 50% until January 1, 2026, after which it increases to 66.7% for gains exceeding $250,000 annually for individuals and for all gains for corporations.
2. Does Your Professional Corporation Qualify for LCGE?
To claim the LCGE, the shares of your professional corporation must be classified as "Qualified Small Business Corporation (QSBC) Shares." This requires meeting three key conditions:
1. Ownership Test
You (or a related person) must have owned the shares for at least 24 months before the sale.
2. Asset Test (50% Rule for the Past 24 Months)
During the 24 months before the sale, at least 50% of the corporation's assets must have been used in an active business in Canada
3. Asset Test at the Time of Sale (90% Rule)
At the time of sale, at least 90% of the company's assets must be used in an active business in Canada
3. Challenges for Professional Corporations
Professional corporations often face difficulties qualifying for the LCGE because
They may accumulate passive investments (such as real estate, stocks, or retained earnings), which can cause them to fail the asset tests.
If the corporation holds too many passive investments, it may not meet the 90% active business asset test at the time of sale.
4. Strategies to Qualify for the LCGE
If your professional corporation doesn’t currently meet the QSBC share requirements, you may be able to "purify" the corporation to regain eligibility. Some common strategies include:
Paying out excess cash or retained earnings to remove passive assets.
Transferring passive investments to a holding company to ensure the PC meets the 90% active business asset test.
Reinvesting excess funds into active business operations instead of passive investments.
5. Planning for Capital Gains Tax Changes (2026 Onward)
As of January 1, 2026, the capital gains inclusion rate will increase to 66.7% for gains exceeding $250,000 per year for individuals and for all gains for corporations and trusts.
If you are planning to sell shares of your professional corporation, it may be beneficial to do so before 2026 to take advantage of the current 50% inclusion rate.
Key Takeaways
Professional Corporations can qualify for the LCGE, but only if they meet the QSBC share requirements
The LCGE limit is $1.25 million as of 2024, providing a significant tax benefit.
Passive investments in the corporation can disqualify it from the LCGE, but tax planning can help restore eligibility.
Upcoming tax changes in 2026 will increase the capital gains inclusion rate, making early planning essential.
If you’re considering selling your professional corporation, consulting a tax advisor or accountant can help maximize your exemption and ensure compliance with the latest tax rules.
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