Understanding the Lifetime Capital Gains Exemption

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The Lifetime Capital Gain Exemption (LCGE) was introduced in Canada in 1986.  The LCGE allows for individuals to shelter a certain amount of capital gains on disposed property if certain conditions are met. 

What You Need to Know

Who Qualifies?

The LCGE amount of $866,912 (2019) applies to capital gains from tax resulting in from the disposition of Qualified Small Business Corporation shares.  Additionally, another exemption of $1,000,000 (2019) exists for the disposition of qualified farming or fishing property.  The exemption is only available to individual tax payers in Canada, and is not extended to corporations.

The LCGE creates a deduction from net income (worth 50% of the exemption, as individuals are only taxed on 50% of a capital gain).

How to Qualify

There are three basic tests that must be met at the time of disposition in order for said disposition to qualify for the LCGE:

Small Business Corporation Test (SBC)

The SBC test demand that at least 90% of the company’s assets using fair market value must be used in active business being carried out primarily in Canada (50% or more of business).

The Holding Period Test

The holding period test requires that the disposed of share(s) must have been held by the shareholder for the 2-year period prior to disposition.  This rule is intended to limit the LCGE to long term investments rather than short term, frequently flipping investments.

Basic Asset Test

The basic asset test is essentially a combination of the two prior tests. It states that the disposed of shares must have been part of a CCPC for at least 2 years prior to disposition and that at least 50% of the business conducted by the corporation was in Canada.

The Bottom Line

The above information is basic in nature and there are many factors that should be considered before taking advantage of this strategy.  As always, it is prudent to work closely with your accountant and financial advisor to ensure that you qualify for the exemption and that it is executed correctly.   It is also important to note that there are special rules laid out by the CRA for dispositions that involved farming and fishing property in Canada.

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Disclaimer

This information is designed to educate and inform you of financial strategies and products currently available. As each individual’s circumstances differ, it is important to review the suitability of these concepts for your particular needs with a Qualified Financial Advisor.