How much is the Lifetime Capital Gains Exemption in 2026?

The LCGE is $1,250,000 in 2026 for qualifying small business corporation (QSBC) shares. This amount is indexed to inflation annually. The LCGE also applies to qualified farm and fishing property, but the small business share limit is what most incorporated business owners use.

What makes shares qualify for the LCGE?

Shares must meet the Qualifying Small Business Corporation (QSBC) test: (1) the shares must be of a Canadian-controlled private corporation (CCPC); (2) at the time of sale, at least 90% of the corporation's assets must be used in an active Canadian business; (3) throughout the 24 months before the sale, at least 50% of assets must have been used in an active business; and (4) the shares must not have been owned by anyone other than you or a related person during the 24 months before sale.

What is purifying a corporation before the LCGE?

Purification means removing passive assets (cash, investments, real estate not used in the business) from the corporation before a sale to meet the 90% active asset test. Common techniques include paying large dividends, repaying shareholder loans, or transferring passive assets to a holding company before the holding period resets.

Can a husband and wife both use the LCGE on the same business sale?

Yes, if both own qualifying shares. Each individual has their own LCGE. With proper share structure (e.g., a family trust as shareholder), each family member with shares can claim up to $1,250,000 of their own LCGE — multiplying the exemption. A trust can allocate capital gains to multiple beneficiaries, each claiming their own LCGE.

Is any LCGE amount already used up if I've had it before?

Yes. The LCGE is a lifetime cumulative limit. If you previously claimed $400,000 of LCGE on a prior business sale, only $850,000 remains available in 2026. You can check your remaining room on Schedule 3 of your T1 or by reviewing your prior CRA assessments. CRA tracks usage in your tax history.

Lifetime Capital Gains Exemption (LCGE) Canada: $1.25 Million on Small Business Shares (2026)

What Is the Lifetime Capital Gains Exemption?

The Lifetime Capital Gains Exemption (LCGE) is one of the most powerful tax planning tools available to Canadian small business owners. It allows an individual to shelter up to $1,250,000 (2026) of capital gains from a qualifying business sale entirely from federal and provincial income tax.

On a $1.25M capital gain with no LCGE, the federal/Ontario tax bill would be approximately $330,000–$360,000. With the LCGE, it’s $0.

The LCGE applies to capital gains on:

Qualifying Small Business Corporation (QSBC) shares ← most common for incorporated owners
Qualified farm property
Qualified fishing property

The Three Tests for QSBC Shares

To use the LCGE on a business sale, the shares must meet all three tests at the time of sale:

Test 1: At-Sale Test (90% Active Assets)

At the time of sale, at least 90% of the fair market value of the corporation’s assets must be used principally in an active business carried on primarily in Canada.

Problem: Corporations that have accumulated cash or investments — even legitimately — may fail this test. A corporation worth $2M with $300,000 in a GIC and $200,000 in a stock portfolio has $500,000 of passive assets = 25% of total value → fails the 90% test.

Test 2: 24-Month Holding Period Test (50% Active Assets)

Continuously throughout the 24 months immediately before the sale, more than 50% of the FMV of the corporation’s assets must have been used in an active Canadian business.

This test catches recent purification — you can’t move passive assets out the week before a sale.

Test 3: 24-Month Ownership Test

The shares must not have been owned by anyone other than the seller or a person related to the seller throughout the 24-month period before the sale.

This prevents someone from buying shares, waiting 24 months, and claiming the LCGE on appreciation someone else built.

Why Corporations Fail the Asset Tests: The Retained Earnings Problem

Successful businesses accumulate cash, investments, and other passive assets over time. A profitable company with $1M in retained earnings may hold those as:

Cash in a corporate savings account (passive)
GICs or a corporate investment portfolio (passive)
An investment property not used in the business (passive)

These passive assets can push the corporation over the threshold and disqualify the shares. This is extremely common — and why purification planning years before a business sale is essential.

Purification Strategies

Purification removes passive assets from the corporation before the 24-month period becomes relevant. Common methods:

1. Pay Out Cash as Salary or Dividends

The simplest approach. Pay large dividends or bonus salary to drain the passive cash from the corporation. This triggers personal tax now but may be far less than the LCGE tax savings on a future sale.

2. Transfer Passive Assets to a Holding Company

Dividend excess cash from the operating company to a holding company (tax-free inter-corporate dividend between connected CCPCs). The holding company holds the passive investments; the operating company becomes asset-clean. The 24-month clock then begins.

3. Repay Shareholder Loans

If you have loaned money to the corporation, have the corporation repay you to remove the passive asset (cash) from corporate books.

4. Capital Dividend Account (CDA)

If the corporation has a CDA balance (from prior capital gains), the corporation can pay a tax-free capital dividend to extract passive cash at no personal tax cost. This is rare but powerful when available.

Family Trust Structure: Multiplying the LCGE

Each individual has their own $1,250,000 LCGE. A family trust as the shareholder structure can allow multiple family members to each claim their own exemption on sales of QSBC shares.

How It Works

Corporation is set up with two types of shares: common shares (growth shares held by the family trust) and preferred shares (held by the founder)
The family trust has beneficiaries: spouse, children, founder
When the business is sold, the capital gain on the common shares flows through the trust
The trustee allocates the capital gain to beneficiaries who each claim their own LCGE

Example:

$5,000,000 sale for a business with $500,000 ACB = $4,500,000 capital gain
Family trust has 4 beneficiaries: founder, spouse, child 1 (18+), child 2 (21)
Each claims $1,125,000 of capital gain under their LCGE (total $4,500,000 = $4 × $1,125,000)
Combined LCGE shelters the entire gain → $0 in tax on a $4.5M capital gain

This is a legitimate and widely used structure — but must be set up well in advance (typically 5–10 years before a sale) to meet the 24-month tests and avoid attribution rules.

Note: TOSI (Tax on Split Income) rules apply after 2017. Minor children (under 18) cannot effectively use the LCGE on a business sale. Family members must be actively involved in the business or meet exemption tests.

LCGE and the Capital Gains Inclusion Rate

Capital gains are included in income at the 50% inclusion rate (for individuals, on the first $250,000 of annual capital gains from June 25, 2024 — gains above $250,000 are included at 2/3). The LCGE shelters the full gain amount, so the inclusion rate is irrelevant for LCGE-sheltered gains — there is no tax regardless.

Checking Your Remaining LCGE Room

Your lifetime LCGE usage is tracked by CRA. To check your remaining room:

Review Schedule 3 (Capital Gains) of prior T1 returns
Look for Form T657 (Calculation of Capital Gains Deduction)
Contact CRA or log in to My Account to review prior year assessments