The Lifetime Capital Gains Exemption (LCGE) is a tax provision in Canada that allows individuals to avoid paying taxes on capital gains from the sale of a qualified small business. This exemption was introduced to encourage entrepreneurship and small business growth by providing a tax advantage to individuals who invest in and subsequently sell their businesses. It can also make it easier for small business owners to save for retirement. Overall, you can end up reaping huge savings.
These Changes Took Place as of June 25, 2024
Under the current rules, individuals are eligible for an LCGE of up to $1 million on the sale of their qualified small business shares. This means that, if an individual sells their small business shares and realizes a capital gain below this threshold, they can avoid paying taxes on that gain. Now, with the Budget 2024, and as of June 25, 2024, the sales of small businesses have increased to $1.25 million and will be indexed in inflation thereafter.|
Qualified Small Businesses
The new budget included measures to expand the types of businesses that qualify for the exemption, making it more accessible to a wider range of small business owners, especially to support small businesses in light of the ongoing challenges posed by the COVID-19 pandemic. Determining eligibility can be complicated so it is best to speak with a professional or read more about it on the Government of Canada website, however, here are the basics:
- Your corporation must be considered a small business corporation (SBC) at the time of sale
- All or substantially all of its business is primarily done in Canada
- It must be a share sale of your business, not an asset sale
- More than 50% of the business’s assets must have been used primarily in Canada for 24 months prior to the sale; and more than 90% at time of sale
- The shares must have been owned for at least 24 months prior to the sale
You do not automatically receive the LCGE. Three tests will need to be met in order to qualify for it at the time of sale regarding eligibility. In order to meet these test requirements, preparation should take place at least two years prior to the sale and ideally every year thereafter in case of an unexpected event.
What is a Small Business Corporation?
An SBC in Canada refers to a corporation that meets certain criteria for being classified as a small business, including the size of its assets, annual gross revenue, and the number of employees. A corporation is considered an SBC if:
- The taxable capital employed in Canada is less than $15 million
- The corporation is a Canadian-controlled private corporation where at least 50% of the shares are owned by Canadian residents
- The annual gross revenue does not exceed $10 million
- They employ an average of 100 or fewer full-time employees throughout the taxation year
Thinking of Passing Your Corporation Down to Family Members?
To take advantage of the LCGE when transferring assets to family members, certain conditions must be met. The individual transferring the assets must be a Canadian resident and the recipient must be related by blood, marriage, or common-law partnership. It is important to seek advice from a professional when considering the use of the LCGE when passing down assets to family members. They can help analyze the specific circumstances and provide guidance on the most tax-efficient way to transfer the assets while maximizing the benefit of the LCGE, especially if there are minor family members (children or grandchildren) involved.
You Can Save up to $423,797 in Taxes in Ontario
With the budget increasing to $1.25 million, the tax savings of each LCGE can save you up to $423,797when you sell your business in Ontario. For example, if you have four adult family members and can use their LCGE at the time of sale, that is $1,695,188 in tax savings!
The LCGE Can Help You Reap Savings
Overall, the changes made to the LCGE in the 2024 federal budget are designed to support small businesses while also promoting long-term investment in these sectors. By increasing the exemption amount and adjusting the eligibility criteria, the federal government aims to create a more equitable tax system that rewards these small businesses and supports economic growth. However, it can get complicated so it’s always best to seek advice from an expert such as the ones at Pharma Tax, especially if you’re thinking of selling or passing down your SBC.
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