Small businesses are the backbone of Canada.

They account for 97.9 percent of total employer businesses in Canada, according to Statistics Canada. They also employ 67.7 percent of the private labour force. Most entrepreneurs use their business to earn a living, build wealth and retire comfortably. The Canada Revenue Agency (CRA) gives a significant tax benefit to small business owners who have spent a lifetime building a business and are now selling it to retire. The CRA calls it the Lifetime Capital Gains Exemption (LCGE).

You can claim a Lifetime Capital Gains Exemption (LCGE) of $892,218 in 2021 and $913,630 in 2022. If you sell a qualified farm or fishing property, the Lifetime Capital Gains Exemption (LCGE) amount goes up to $1 million. These amounts probably made you excited, and they should. After all, this is your lifetime’s earnings we are talking about. But claiming a Lifetime Capital Gains Exemption is not as easy as it looks. Many entrepreneurs don’t know about it, and many don’t know the various preconditions you need to meet to qualify for this exemption.

In this article, we will review the Lifetime Capital Gains Exemption in detail and how a small business owner can leverage this tax benefit.

Basics of Lifetime Capital Gains Exemption

The CRA charges a long-term capital gains tax when you sell an asset or investment. Your capital gain or loss is the selling price minus the cost price. For tax purposes, you must add 50 percent of the gain/loss to your taxable income for the year you receive the gain. Now, the CRA gives you an exemption in this. So throughout your life, you can enjoy a certain amount of capital gain, and the CRA won’t levy a tax on it. This amount is the Lifetime Capital Gains Exemption, which the agency adjusts for inflation every year.

The Lifetime Capital Gains Exemption (LCGE) for 2022 is $913,630, which means if you are selling your business for $1,000,000 your total capital gain will be $86,370 ($1,000,000 – $913,630). For tax purpose, you will add $43,185 ($86,370*50%) to your taxable income. In the absence of the LCGE, your capital gains would be $500,000 for tax purposes. The exemption deducted $456,815 from your taxable income.

In another scenario, you could sell some of your shares in the business for a $500,000 gain. You still have $413,630 ($913,630 – $500,000) from the LCGE, which you can claim some other year when you sell more shares or property. By that time, the LCGE limit would also increase. This exemption looks lucrative, but you need to fulfill conditions to claim this lucrative tax break.

Are You Eligible for the Lifetime Capital Gains Exemption?

The CRA has created LCGE to enable small business owners who spent a lifetime building their business to get something worthwhile out of it. If you are selling shares of your small business, they should be of a “qualifying small business corporation.” When you sell these shares, make sure the company used more than 50 percent of its assets to carry out active business for the last two years and had over 90 percent of the assets in the active business at the time of sale.

The CRA has kept these conditions to prevent business owners from hoarding cash and withdrawing them tax-free using LCGE. Hence, the requirement is 90 percent of the assets are used in the active business.

Now, there is another catch. You cannot take advantage of LCGE if the corporation’s shares are up for sale on a stock exchange through an Initial Public Offering (IPO). This is because a qualifying small business corporation has shares not traded on a public stock exchange.

Contact Glenn Graydon Wright LLP in Oakville for Experienced Corporate Tax Advice

Several conditions must be met to utilize the LCGE, and the rules can grow more complicated depending on the situation. While the Lifetime Capital Gains Exemption can save you a huge tax bill, your business must first meet the criteria. So don’t rush to sell your shares. Instead, talk to a qualified tax professional to confirm your eligibility for an LCGE.

At Glenn Graydon Wright LLP, our team of business experts will study your financial situation and guide you through the necessary steps to become eligible for the Lifetime Capital Gains Exemption (LCGE). In addition, our team will provide you with the information required to make the most of this benefit and other benefits offered to small business owners by the CRA. To learn more about how Glenn Graydon Wright LLP can provide you with up-to-date corporate tax advice, contact us online or by telephone at 905-845-6633.