At a glance
- The lifetime capital gains exemption (LCGE) may provide significant tax savings when qualifying business shares are sold.
- QSBC shares must meet asset and ownership requirements, including texts covering the 24 months preceding a sale.
- Holding company structures and non-qualifying assets can affect LCGE eligibility.
- Reviewing your corporate structure before a potential sale can help identify qualification issues.
For many Canadian business owners, the LCGE can provide significant tax savings when shares of a business are sold. However, access to the exemption is not automatic. The shares being sold must satisfy detailed requirements, including some that apply during the 24 months preceding a sale. Which is why, careful planning well before a transaction is important.
For 2026, the capital gains exemption is available on up to $1,275,000 of qualifying capital gains, subject to the individual's available exemption and other applicable requirements. Depending on an individual’s marginal tax rate and province of residence, the exemption can provide tax savings of almost $350,000. Where several individuals within the family unit can benefit from the exemption, the tax savings can be significant.
Waiting until a buyer approaches may leave business owners with insufficient time to plan for the gain on their shares to qualify for the LCGE. Excess cash, investments or other non-business assets can potentially prevent shares from qualifying, while certain problems cannot be corrected immediately before closing because of the 24-month holding period tests.
Which shares can qualify for the LCGE?
The exemption can generally apply to an individual's capital gain from disposing of qualified small business corporation (QSBC) shares. Among other requirements, the individual must generally be resident in Canada throughout the taxation year, although special rules apply if shares are disposed of in the year of arrival or in the year of departure from Canada. Also, the shares must satisfy the QSBC share tests.
The same amount of LCGE is available on the disposition of qualifying farm or fishing property or corporations. However, the details of those exemptions are not covered in this article.
While the legislation is detailed, business owners can consider the main QSBC requirements as three questions:
- Does the corporation qualify when the shares are sold?
- Has the corporation satisfied the required asset test during the preceding 24 months?
- Have the shares satisfied the required ownership conditions during that period?
Here’s what each requirement means in practical terms:
The corporation must pass a 90% test at the time of sale
At the time of sale, the shares must be shares of a small business corporation, which is generally a Canadian-controlled private corporation, with at least 90% of the fair market value of its assets attributable to:
- assets used principally in an active business carried on primarily in Canada by the corporation or a related corporation;
- shares or debt of connected small business corporations; or
- a combination of these assets.
Importantly, the test is based on the fair market value of the corporation's assets, rather than simply the amounts shown on its balance sheet.
Excess cash, marketable securities, foreign investments and other non-operating assets can therefore create problems, depending on the circumstances. Also, operations carried on outside Canada will create non-qualifying assets.
There is also a lookback over the preceding 24 months
During the relevant 24-month holding period, more than 50% of the fair market value of the corporation's assets must generally be attributable to:
- assets used principally in an active business carried on primarily in Canada by that corporation or a related corporation; or
- shares or debt of connected corporations that themselves meet the required asset-use conditions.
This 24-month lookback is one of the key reasons to start planning well before an anticipated sale.
The ownership history of the shares matters
There is a separate ownership requirement. Broadly, throughout the 24 months immediately preceding the sale, the shares generally cannot have been owned by an unrelated person or partnership. Special rules can also apply to newly issued shares, which may prevent those shares from qualifying where they are sold before satisfying the required holding period, unless a specific exception applies. As a result, changes in ownership, reorganizations and the introduction of new holding companies or shareholders should be reviewed carefully if a future sale is contemplated.
Can holding company shares qualify for LCGE?
The analysis can become considerably more complicated when the company being sold is a holding company that owns shares or debt of one or more operating or other corporations.
A holding company is not automatically disqualified from QSBC status. Its shares can qualify if the holding company and the underlying corporate structure satisfy the applicable requirements.
The rules effectively require businesses to look through the corporate chain and consider the assets of connected corporations whose shares or debt are being relied upon as qualifying assets.
There is also an important modified rule that can effectively increase the asset threshold for certain connected corporations from more than 50% to at least 90% during affected periods. Whether that rule applies depends on the composition of the assets throughout the corporate group. It does not mean that everycompany within a holding-company structure must satisfy the 90% test throughout the entire 24 months.
Given the complexity of these rules, a BDO tax advisor can help you assess the applicable requirements.
How non-qualifying assets can affect LCGE eligibility
Over time, a successful business can accumulate assets that may not qualify as active business assets. For example, accumulated investment assets, marketable securities, certain foreign investments or excess cash may affect the QSBC calculation. Whether a particular asset, including cash, constitutes a qualifying asset depends on the particular facts.
If these assets become too significant relative to the value of the business's qualifying assets, the corporation could fail either the 90% test at closing or the applicable test during the 24-month holding period.
Business owners will sometimes undertake "purification" planning, meaning steps designed to reduce non-qualifying assets or otherwise improve the corporation's asset mix. Because the rules include a historical 24-month test, purification immediately before a sale may not solve every qualification issue. Reviewing the corporate structure well in advance of a sale can therefore be valuable.
Here’s why early planning matters
A sale is not always planned years in advance. An unsolicited offer may arrive unexpectedly. A shareholder may also die unexpectedly,resulting in tax consequences before the corporation has been prepared for the QSBC requirements. Proactive planning can help protect access to the exemption in these circumstances.
If a sale may occur during the next several years, consider the following steps:
Key considerations for business owners
If you own shares of a private corporation and are considering selling the business, keep these points in mind:
Thinking about selling your business?
Selling a business involves more than tax considerations. From preparing for a sale to navigating the transaction process, there are several factors to consider. Explore BDO's Selling your business guide for insights to help you navigate the process.
How BDO can help
The lifetime capital gains exemption can represent a valuable opportunity for Canadian business owners, but preserving access to it requires more than checking a corporation's balance sheet just before closing. The corporation's history, asset composition, ownership history and, where applicable, the assets of connected corporations can all matter.
While this article contemplates the sale of a business, a deemed sale can occur on departure from Canada or upon death. This article provides general considerations for a contemplated sale where the gain would qualify for the LCGE. It does not cover many of the detailed considerations that can be crucial to claiming the exemption.
If you are contemplating the sale of your business or want to assess whether your corporation is positioned appropriately for a future opportunity, contact your BDO tax advisor.
The information in this publication is current as of Oct. 15, 2026.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.