Introduction
In the Canadian Tax landscape, the “Lifetime Capital Gains Exemption (LCGE)” stands out as a powerful tool for entrepreneurs and investors who put a great deal of effort into investing, growing and sustaining their businesses. This provision offers an Eligible individual an opportunity to shield a significant portion of capital gains from taxation when selling an Eligible property. Let’s explore the specifics of the LCGE and examine its impact through a practical example.
What is the Lifetime Capital Gains Exemption (LCGE)?
The LCGE is a tax benefit provided by the Canadian Tax Authority (CRA) to encourage investment in qualified small businesses (QSBCS) and qualified farming or fishing properties (QFFP). This exemption allows eligible individuals to shield a predetermined amount of capital gains realized from the sale of eligible property, ultimately fostering economic growth and entrepreneurial ventures.
Eligible Individual
To be eligible to claim LCGE, you need to be a resident of Canada for that tax year in which you sell an eligible property. CRA also considers factual or deemed residents of Canada to be eligible for this exemption.
Eligible Property
Disposition of shares in a qualified small business (QSBCS), disposition of qualified farm or fishing property (QFFP) and any reserves brought into income on account of these, are eligible properties for LCGE.
LCGE limit
There is a lifetime limit of LCGE defined by CRA. For example, for 2022 if you disposed of qualified small business corporation shares (QSBCS), the LCGE limit was $ 913,630. Similarly, for qualified farm or fishing property (QFPP) from 2016 to 2022, the LCGE limit was $1,000,000. Since this is a lifetime cumulative limit, you may use it more than once until you have exhausted it completely during your lifetime.
CRA has gradually increased these limits in the past few years, considering inflationary and other factors.
LCGE Example
Let’s consider Michael selling his qualified small business corporation shares (QSBCS) with a gross capital gain of $1,500,000 in 2022. Assuming Michael never used LCGE previously in his lifetime, the after-tax proceeds with LCGE and without LCGE look as below;
| Description | LCGE $ | Without LCGE $ |
| Gross Capital Gain [A] | 1,500,000 | 1,500,000 |
| 2022 LCGE limit for QSCBC | 913,630 | – |
| Taxable Capital Gain | 586,370 | 1,500,000 |
| Inclusion rate | 50% | 50% |
| Taxable Income | 293,185 | 750,000 |
| Marginal Tax rate | 53.53% | 53.53% |
| Taxes Payable [B] | 156,942 | 410,475 |
| Net after-tax proceeds [A-B] | 1,343,058 | 1,089,525 |
**Please note above calculation is prepared for illustration purposes only, actual tax % and amount may vary depending on your tax scenario
As you can see in the above example, the benefit of claiming Lifetime Capital Gains Exemption (LCGE) helped Michael save $253,533 ($1,343,058 – $1,089,525) in terms of net after-tax proceeds in hand.
Conclusion
The Lifetime Capital Gains Exemption is a valuable tool that empowers Canadians to invest, grow businesses, and contribute to the nation’s economic prosperity. Entrepreneurs and investors alike should carefully assess their eligibility and leverage the LCGE to optimize their tax outcomes. We at ASA Professional Corporation can help you with personalized advice tailored to your unique circumstances. Unlock the potential of the Lifetime Capital Gains Exemption and pave the way for a more tax-efficient and prosperous financial future.