If you ever plan to sell your business, there’s a Canadian tax rule that can dramatically change what you keep after the deal closes: the Lifetime Capital Gains Exemption (LCGE). 

When it applies, it can shelter up to $1.25 million of eligible capital gains per person on the sale of qualified small business corporation (QSBC) shares (and also qualified farm/fishing property). 

The problem? Many owners assume they’ll qualify, then discover too late that they don’t.

LCGE in plain English

The LCGE is a deduction you can claim to reduce (or potentially eliminate) the taxable portion of certain capital gains, including gains from selling QSBC shares, up to your lifetime limit. 

The federal government increased the LCGE limit to $1.25 million for eligible dispositions occurring on or after June 25, 2024, and public summaries note it’s intended to be indexed starting in 2026.

What actually has to be true for your sale to qualify

To use the LCGE on a business sale, you generally need the shares you’re selling to be QSBC shares. The “QSBC” label has specific tests—this is where owners get surprised. 

1) The “90% at the time of sale” test (the big one)

At the time of sale, all or substantially all (commonly interpreted as ~90% or more) of the corporation’s assets must be used principally in an active business carried on primarily in Canada (or certain related/connected share/debt assets). 

Why owners fail this test: Over time, many companies accumulate things like excess cash, marketable securities, or passive investments inside the corporation. Those assets can reduce the “active business asset” percentage and put QSBC status at risk. 

2) The “50% over the prior 24 months” test

During the 24 months before the sale, more than 50% of the fair market value of the assets generally must have been used principally in an active business in Canada (or in the active business of a related corporation). 

3) The “24-month holding period” concept

QSBC rules also involve a two-year window, including share-holding requirements that often show up as “held for at least 24 months” in practical planning conversations. If you’re contemplating a sale, this is one reason why last-minute restructuring can get tricky. 

(Important note: the detailed mechanics can depend on your exact corporate history and ownership chain, your accountant/tax advisor should confirm how these tests apply in your case.)

Why this matters more in higher-tax provinces

When a business sale doesn’t qualify for the LCGE, the capital gain becomes taxable under normal rules, meaning your after-tax outcome depends heavily on your marginal tax rate. CRA publishes that provincial rates vary, and provinces with higher top marginal rates will generally see a larger difference between “LCGE-qualified” and “not qualified.” 

(For example, KPMG’s 2026 table shows Nova Scotia among the higher combined top marginal rate provinces, which is why planning around exemptions and deductions tends to be especially valuable in practice.)

The part most owners miss: you don’t “decide” to use LCGE at the closing table

The LCGE isn’t something you flip on at the last second, it’s something you qualify for based on how your company’s assets and shares have been structured leading up to the sale. That’s why QSBC “status management” (keeping the corporation within those asset tests) is a recurring theme in professional guidance. 

If you might sell in the next few years, the practical takeaway is simple:

Don’t wait for a buyer to show up to find out whether you qualify.

A simple checklist to discuss with your accountant (before you’re selling)

Here are the three questions worth asking early:

1. Would my shares qualify as QSBC shares if I sold today? (90% test at sale)
2. Have we stayed above the 50% active-asset threshold over the last 24 months?
3. Do we have any “extra” assets inside the corporation that could hurt QSBC status? (cash/investments that aren’t used in the active business) 

Final thought

The LCGE can be one of the biggest tax advantages available to business owners, up to $1.25 million of eligible gains per person, but only if the shares qualify. 

If a sale is even a “maybe someday,” it’s worth checking your QSBC status now, because the best time to fix a problem is when you still have time.