If you sell your business, chances are you’ll make some money. Now normally you’d have to pay taxes on any income you make, including that from the sale of a business. But there’s a tax tool that stops you from having to pay taxes on all or part of the profit you gain. And this tool is called the Lifetime Capital Gains Exemption (LCGE).
The LCGE is an exemption that can be applied to any net gains received on the sale of qualified property. Qualified property includes:
- Qualified small business corporation shares
- Qualified farm property
- Qualified fishing property
- Reserves brought into income in a given tax year from either of the above
Note that the sale of small business assets such as a building does not qualify for the LCGE. However, you can roll over business assets into a corporation and then sell shares. Certain farm and fishing assets, including land, boats and licenses, do qualify for the LCGE.
The amount of the exemption depends on the type of property. If you sold qualifying shares, the LCGE is $892,218 (in 2021) of capital gains. But remember, only 50% of capital gains are taxable. That means you’ll save up to $446,109 on your taxable capital gains.
If you sell farm or fishing property, the exemption is $1,000,000. That means you’ll be able to reduce your taxable capital gains by $500,000.
Example
Let’s say you sell small business corporation shares this year and make a profit of $950,000. Without the LCGE you would have to pay taxes on $475,000 (50% of $950,000). That would be a hefty tax bill!
But with the LCGE you can reduce the profit by $892,218. So you would only pay taxes on $28,891 (($950,000 - $892,218) x 50%).
And the LCGE is a cumulative lifetime limit. That means you can use the exemption multiple times, until you reach the maximum amount of $892,218 (or $1,000,000 for far and fishing property).
Example
You sell small business corporation shares and get a profit of $300,000. That means you’ll only need to use $300,000 of your LCGE. So you can apply the remaining $592,218 ($892,218 – $300,000) to future profits.
The one major downfall on the LCGE is that determining whether you qualify is complicated. The general requirements are:
- Your business must be a small business corporation when sold. Sole proprietorships and partnerships won’t qualify.
- You must be selling shares (with a few exceptions for farm and fishing property).
- For 24 months before the sale, you must have used more than 50% of the business’ assets in an active business in Canada.
- In the past 24 months, the shares must have been owned by you or a relation.
If you need help determining whether you qualify for the LCGE or wish to apply, contact us today.
