May 15, 2025
If you're a Canadian entrepreneur or small business owner, you've likely spent years building your business. And when it’s time to sell or transition your business corporation shares—whether through retirement, estate planning, or succession—the last thing you want is for capital gains taxes to erode your hard-earned equity.
The good news: the federal government has raised the Lifetime Capital Gains Exemption (LCGE) limit. This strategic update to the tax landscape provides substantial tax relief and planning opportunities for business owners, especially those with eligible businesses, professional corporations, or family-owned businesses.
First: What’s a Capital Gain—and What’s the LCGE?
A capital gain is the profit you make from the sale or deemed disposition of capital property, like business shares or farm property. In Canada, only a portion of capital gains is taxable—known as the capital gains inclusion rate. For most individual shareholders, this remains at 50%.
The LCGE allows you to exclude a significant portion of those taxable capital gains from your tax return, effectively reducing your tax burden. It’s a tax incentive program designed to reward those contributing to the Canadian business community.
What’s Changed? A Higher Lifetime Limit Starting June 25, 2024
New Lifetime Capital Gains Exemption Limits:
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Date Range
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LCGE Limit
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Before June 25, 2024
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$1,016,836
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June 25, 2024 – Dec 31, 2025
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$1,250,000
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From Jan 1, 2026
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Indexed to inflation
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This increase in exemption limits means that eligible capital gains from the sale of shares in a Canadian-controlled private corporation (CCPC) or qualified farm property can be sheltered up to $1.25 million. With the inclusion rate unchanged, the return from the sale of your business assets is more tax-efficient.
Wasn’t the Government Raising the Capital Gains Inclusion Rate?
Yes, but those changes were reversed. In 2024, the Budget proposed increasing the inclusion rate on capital gains over $250,000 from 50% to 66.67%. However, that inclusion rate increase was cancelled in the 2025 Federal Budget.
Result: More tax incentive, same tax rate = increased tax savings.
Bonus: The Canadian Entrepreneurs’ Incentive (CEI)
The CEI offers an even lower tax rate on gains from eligible businesses—just one-third of the normal rate—up to a $2 million lifetime limit. It’s separate from the LCGE, but compatible with it.
This super capital gains exemption is a powerful planning tool for entrepreneurs in innovation-focused or active business sectors.
Who Qualifies for the LCGE?
To benefit from this capital gains exemption:
✅ Shares must be of a Canadian-controlled private Corporation (CCPC)
✅ 90% of assets must be active business assets at the time of disposition
✅ Over the 24 continuous months prior, more than 50% of assets must be used in active business income generation
✅ You must have held the shares for at least 24 months
Professional practices and sole proprietorships should consider incorporation and other thoughtful strategies to become eligible.
Selling to Family? Know the Rules
Recent legislation, including Bill C-208 and updates under Bill C-59, now allows family-owned businesses to qualify for tax advantages when shares are transferred to children or grandchildren. Requirements include:
🔸 Transfer of control within 36 months
🔸 Active involvement of family members in the business
🔸 A holding period post-transfer to ensure compliance
These anti-avoidance rules help maintain fairness while offering benefits for business owners planning succession.
What You Could Save
If you sell your business corporation for $1.2 million:
- You could potentially shelter the entire capital gain
- Depending on your province and inclusion rate, this might reduce your capital gains tax by $250,000+
Note: Your savings will vary based on province, tax rate, adjusted cost base, and business structure.
Key Strategies and Considerations
- Use crystallization strategies to lock in gains at current rates
- Evaluate compliance with trust and beneficiary rules if using trusts
- Review operational costs and payroll costs in advance of a transaction
- Seek guidance on regular vs. parallel tax calculation
- Monitor fair market value and basis for accurate tax calculation
Final Thoughts: Your Opportunity to Plan
The increase in the LCGE and introduction of the CEI are major benefits for business owners and shareholders looking to reduce capital gains tax through effective financial planning. This is the time to:
- Consult with tax advisors about alternatives and compliance
- Consider estate and retirement planning strategies
- Align your business services and succession plan with the new legislation
These updates offer a rare chance to reduce the tax implications of the ultimate sale of your business. Don’t navigate it alone—partner with professional advisors to protect your success and legacy.
