Lifetime Capital Gains Exemption 2026: Who Qualifies and How It Works
- Targeted Accounting
- Business
Table of Contents
What Is the Lifetime Capital Gains Exemption?
When you sell the shares of your own company, the lifetime capital gains exemption (LCGE) can shelter most or all of the gain from tax. For 2026 the limit is $1,275,000 per person. It is one of the largest tax breaks available to a Canadian business owner, and one of the easiest to lose through poor timing, which is why it belongs in any small business tax planning conversation years before a buyer appears.
This guide covers the current limit, the three share tests, purification, the items that reduce your claim, alternative minimum tax and a worked example. For the wider process of a sale, see our guide to selling a business in Canada.
How the Lifetime Capital Gains Exemption Works in 2026
The LCGE is a deduction against capital gains on qualified small business corporation (QSBC) shares and on qualified farm or fishing property. It is a lifetime amount, so whatever you use on one sale reduces what is left for the next.
The limit rose to $1.25 million for dispositions after June 24, 2024, and indexation resumed in 2026, which brings it to $1,275,000 (see the CRA’s 2026 indexation table). Because half of a capital gain is taxable, the deduction you actually claim on your return is half that amount, $637,500.
The capital gains inclusion rate is still one-half. The proposal to raise it to two-thirds was cancelled in March 2025, and Budget 2025 confirmed the government would not proceed with the Budget 2024 capital gains package. That package included the proposed Canadian Entrepreneurs’ Incentive, so the incentive was never introduced (see Finance Canada’s Report on Federal Tax Expenditures 2026).
Qualified farm or fishing property, such as farmland used in a family farming business, shares the same lifetime limit under its own separate conditions.
Who Qualifies for the Lifetime Capital Gains Exemption: The Three QSBC Share Tests
Your shares must pass all three parts of the CRA’s definition of qualified small business corporation shares:
- 24-month holding test: For the 24 months before the sale, no one other than you, a partnership you belong to or a person related to you owned the shares.
- 50% test throughout the 24 months: For that whole period, the company was a Canadian-controlled private corporation and more than 50% of the fair market value of its assets was used mainly in an active business carried on primarily in Canada, or was shares or debt of connected small business corporations.
- 90% test at the time of sale: On the day of the sale, the company is a small business corporation, meaning 90% or more of its assets by fair market value are active business assets.
Excess cash is the usual problem. Cash the business needs for working capital counts as an active asset. A term deposit or investment account built from years of retained profit does not, and in a profitable company it can push passive assets past 10% without anyone noticing.
If you still run the business as a sole proprietor, the clock has not started. Our guide on when to incorporate a sole proprietorship explains why a planned sale is one of the signals to incorporate.
Purifying a Corporation Before a Sale
Purification means moving passive assets out of the company so its shares pass the tests. Common methods are paying a dividend to take out surplus cash, paying down debt, or moving investments to a holding company or sister corporation, often on a tax-deferred basis. Each route has tax costs and anti-avoidance rules to work through, and each shows up on the company’s T2 corporate tax return, so model it before acting.
The timing trap is the mismatch between the two asset tests. The 90% test looks only at the day of sale, but the 50% test looks back over the full 24 months. If passive assets were more than half the company’s value at any point in that window, a last-minute clean-up passes the 90% test and still fails the 50% test, and the company may need up to 24 more months of clean history before the shares qualify.
Owners who expect to sell within a few years should check the asset mix at every year-end, not when a letter of intent arrives. A holding company set up above the operating company early on lets surplus profit move up regularly, so the operating company stays clean.
Worked Example: Using the LCGE on a $1.6 Million Share Sale
Priya owns all the shares of an Ontario company she started with $100 of share capital. The company passes all three QSBC tests, she has never used her exemption and she has no CNIL or ABIL history. In 2026 she sells the shares for $1.6 million and has no other income that year. Selling costs are ignored.
| Item | Amount |
|---|---|
| Sale price | $1,600,000 |
| Adjusted cost base | $100 |
| Capital gain | $1,599,900 |
| Gain sheltered by the LCGE | $1,275,000 |
| Gain not sheltered | $324,900 |
| Taxable capital gain (one-half of $1,599,900) | $799,950 |
| Capital gains deduction | ($637,500) |
| Taxable income from the sale | $162,450 |
Using 2026 federal and Ontario brackets, the Ontario surtax and basic personal amounts only, regular income tax on $162,450 is roughly $46,500, under 3% of the sale price. Without the exemption, all $799,950 would have been taxable.
How CNIL, ABIL and Alternative Minimum Tax Reduce the LCGE
- Cumulative net investment loss (CNIL): Your investment expenses since 1988, such as interest on investment loans and rental losses, minus your investment income. A CNIL balance reduces the capital gains deduction you can claim. Owners who pay themselves only salary while deducting investment interest can build one without noticing, and taking some dividends in the years before a sale can clear it. The CRA tracks it on Form T936.
- Allowable business investment loss (ABIL): If you have claimed an ABIL, for example on shares of or a loan to a failed small business corporation, it reduces the capital gains deduction available in that year and future years.
- Alternative minimum tax (AMT): Since 2024, federal AMT is 20.5% of adjusted taxable income above an exemption of $181,440 for 2026. Capital gains are fully included for AMT, and gains sheltered by the LCGE are 30% included.
In Priya’s case, the AMT base is 30% of $1,275,000 ($382,500) plus the unsheltered $324,900, or $707,400. After the exemption, federal AMT before credits is about $107,800, against regular federal tax of roughly $29,700, and she pays the higher amount. AMT paid can be carried forward for seven years and recovered when regular tax exceeds AMT, so a sale year followed by modest income can leave some of it unrecovered. These figures are federal only and before credits, which is why a projection before signing is worth having.
Share Sale vs Asset Sale and the Lifetime Capital Gains Exemption
The LCGE applies only when you sell shares. Buyers usually prefer to buy assets: they get a higher cost base to depreciate, they pick what they take and they leave behind the company’s history and any unknown liabilities. Sellers usually prefer a share sale: one level of tax and access to the exemption. In an asset sale the proceeds land inside the corporation, are taxed there and are taxed again when paid out to you. The gap is usually settled on price, a hybrid deal or both.
Family members can each claim their own exemption. When a family trust holds shares, the gain on a sale can be allocated to adult beneficiaries, each of whom can use their own limit. This only works when the trust held the shares well before the sale, and the tax on split income rules, the trust’s 21-year rule and gains allocated to minors all need careful planning.
Rules and figures reflect CRA guidance as of October 2026. This is general information, not advice for your situation.
Planning to Sell Your Business in the Next Few Years?
The work that protects the exemption happens two or more years before a sale: testing the shares, purifying the company and clearing any CNIL. We can review your structure now and stay involved through the sale with our outsourced CFO services.
