Lifetime Capital Gains Exemption (LCGE)

The lifetime capital gains exemption, usually shortened to LCGE, matters most when an owner sells the shares of a private company. Section 110.6 of the Income Tax Act lets an individual deduct the taxable part of capital gains realized on two kinds of property: qualified small business corporation (QSBC) shares and qualified farm or fishing property. For owner-managed companies in the GTA, the shares are what matter.

The exemption is personal and cumulative. Each individual has one lifetime limit, every earlier claim reduces what is left, and unused room cannot be transferred to a spouse or anyone else. Only individuals claim it. A corporation, including a holding company, cannot. A personal trust does not claim it directly, although a gain realized by a family trust can, in the right circumstances, be allocated to beneficiaries who claim their own exemptions. The seller must be resident in Canada throughout the year of the claim; a person resident for only part of the year is treated as resident throughout if they were resident for all of the year before or the year after.

The claim is calculated on CRA Form T657, Calculation of Capital Gains Deduction, and filed with the seller's personal return for the year of sale.

For 2026, the CRA's indexation table sets the exemption limit at $1,275,000 of capital gains. Because only one-half of a capital gain is taxable, the matching deduction limit is $637,500. Earlier limits were lower, so the year of the sale matters:

The jump to $1.25 million was announced in Budget 2024 for dispositions on or after June 25, 2024. On March 21, 2025, the government confirmed it would keep the higher limit, on the same day it cancelled the inclusion rate increase described below. The increase became law through the Budget 2025 Implementation Act, No. 1 (Bill C-15), which received Royal Assent on March 26, 2026, with indexation to inflation resuming in 2026.

Indexation also gives returning sellers a little new room. An owner who used the full $1,250,000 in 2025 has $25,000 of gains left to shelter in 2026, and more as the limit rises with the Consumer Price Index.

Inclusion rate. The exemption works alongside the capital gains inclusion rate, which remains one-half. Budget 2024 proposed raising it to two-thirds for corporations and trusts, and for individuals on annual gains above $250,000. The increase was first deferred to January 1, 2026 and then cancelled on March 21, 2025, and Budget 2025, tabled November 4, 2025, recorded that cancellation. Budget 2025 also recorded the cancellation of the proposed Canadian Entrepreneurs' Incentive, the reduced inclusion rate for founders' gains that Budget 2024 had paired with the increase. Commentary that assumes either measure is out of date.

Alternative minimum tax (AMT). An exempt gain can still produce tax. For 2024 and later years, the AMT calculation includes capital gains in full and allows the LCGE deduction at 7/5 of the amount claimed, so 30% of a sheltered gain stays in the AMT base. A seller with a large exempt gain and little other income can owe AMT in the year of sale, calculated on Form T691. AMT paid can be carried forward for up to seven years and credited against regular tax to the extent regular tax exceeds minimum tax in those years, but it is a cash cost in the year of sale.

Reductions. The available deduction is reduced by allowable business investment losses and by a cumulative net investment loss (CNIL), which builds up when investment expenses, such as interest on money borrowed to invest, have exceeded investment income since 1988. A large CNIL can quietly cut the exemption a seller expected.

The exemption applies only when an individual sells qualifying shares. In an asset sale the seller is the corporation, which cannot claim it. That single rule is often why a seller insists on a share sale and a buyer, who usually prefers assets, asks for a lower price in return. The wider trade-off is covered under asset purchase vs. share purchase and in our guide to selling your business.

Qualifying is not automatic. The shares must pass a 90% active-asset test at the time of sale, a 24-month ownership test and a more-than-50% active-asset test throughout those 24 months. Surplus cash, investment portfolios and rental real estate inside the company are the usual reasons a profitable business fails. Moving those assets out before a sale is called purification. It can fix the 90% test at the time of sale but not a 24-month period that has already failed, so it needs lead time. Lamba Law's free sale readiness checker flags the issue early.

Family ownership can multiply the exemption, because every individual who owns qualifying shares has a separate limit. That ownership must be in place well before the sale, often through an estate freeze or a family trust, so the 24-month test is met. If part of the price is paid in later years, the capital gains reserve can spread the taxable remainder over up to five years.

Crystallization means using the exemption without selling to a buyer. The owner triggers a gain on qualifying shares through an internal transaction, typically a transfer or share exchange at an elected amount under a section 85 rollover, and claims the LCGE against that gain. Nothing changes commercially, but the shares now carry a higher adjusted cost base, so a later sale produces a smaller gain.

Owners crystallize when the shares qualify today but may not later. Common triggers are an incoming foreign or public investor that will end the company's status as a Canadian-controlled private corporation, a build-up of passive assets that is hard to reverse, or an estate freeze. The transaction has to be designed around section 84.1, which can turn a gain into a deemed dividend when shares go to a corporation the owner does not deal with at arm's length, and around AMT and CNIL. The elected amounts, the T657 claim and the corporate records must all match.

Arjun and Kavita Mehta each subscribed for 50% of the common shares of their Oakville HVAC company with their own money when they incorporated it in 2013. In 2026, a strategic buyer offers $3,000,000 for the business. The buyer first proposes an asset purchase, but the Mehtas' accountant confirms the company is a CCPC, has no investment portfolio, and has run well above the active-asset thresholds for the past two years. They negotiate a share sale at the same price, giving the buyer broader representations and a larger indemnity in return.

Because each spouse paid for their own shares, each reports their own gain and claims their own exemption. Each realizes a capital gain of just under $1,500,000 and claims the 2026 exemption of $1,275,000, leaving about $225,000 of gain each, of which one-half, roughly $112,500, is taxable. Without the exemption, the couple would have reported about $1,500,000 of taxable capital gains between them; with it, they report about $225,000.

Before filing, their accountant runs Form T691 for each of them, because 30% of each sheltered gain stays in the AMT base. They set aside part of the proceeds for that calculation; any minimum tax paid becomes a credit they may be able to use against regular tax over the next seven years.