30 September 2026
Lifetime Capital Gains Exemption in Canada: 2026 Rules for Selling Your Business
The lifetime capital gains exemption is the single largest tax break most Canadian business owners will ever use. For 2026 it shelters up to $1,275,000 of capital gains on the sale of qualified small business corporation shares, which can save a BC owner well over $300,000 of personal tax on one transaction. The catch is that the shares must pass strict asset and holding-period tests on the day you sell and for the 24 months before. This guide explains the 2026 limit, the QSBC tests, the reductions that quietly shrink the claim, and how Vancouver owners prepare a corporation years ahead of a sale. Figures are current as of September 2026.
One exemption, one lifetime, strict conditions
The exemption is cumulative. Every dollar you claim on a sale today reduces what is left for a future sale. Because only half of a capital gain is taxable in Canada, the exemption shows up on your return as a capital gains deduction equal to half the limit. The limit was raised to $1,250,000 for dispositions after June 24, 2024 and is indexed to inflation again starting in 2026.
What is the lifetime capital gains exemption?
Section 110.6 of the Income Tax Act lets a Canadian-resident individual deduct part of the taxable capital gain realized on two types of property: qualified small business corporation (QSBC) shares and qualified farm or fishing property. Corporations and most trusts cannot claim it directly, although a family trust can allocate a qualifying gain to individual beneficiaries who then claim their own exemption.
The dollar limit applies to the capital gain, not the taxable half. For 2026 the exemption is $1,275,000, so the maximum deduction is $637,500. CRA indexes the limit annually using the Consumer Price Index. Any exemption you claimed in earlier years, including the $100,000 general exemption election some taxpayers made in 1994, reduces what remains.
The capital gains inclusion rate stays at 50% in 2026. The proposed increase to two-thirds announced in Budget 2024 was cancelled in March 2025 and never became law. Budget 2025 also confirmed the Canadian Entrepreneurs’ Incentive will not proceed, so the exemption described here is the main relief available on a sale of private company shares.
Who qualifies: the three QSBC tests
A share is a QSBC share only if all of the following are true. Fair market value, not book value, is the measure throughout.
1. The 90% test at the time of sale
At the determination time, all or substantially all of the fair market value of the corporation’s assets must be attributable to assets used principally in an active business carried on primarily in Canada, or to shares or debt of connected small business corporations. CRA reads “all or substantially all” as 90% or more.
2. The 50% test for 24 months
Throughout the 24 months before the sale, more than 50% of the fair market value of the corporation’s assets must have been used principally in an active business carried on primarily in Canada, or invested in shares or debt of connected corporations that met the same standard.
3. The 24-month holding period
Throughout the 24 months before the sale, the shares must not have been owned by anyone other than you or a person or partnership related to you. Newly issued treasury shares have their own exception, but shares bought from an unrelated party generally need two years of ownership.
The corporation must also be a Canadian-controlled private corporation at the time of sale. Shares of a public company, a US subsidiary, or a corporation whose value sits mostly in a rental building or an investment portfolio do not qualify no matter how long you have owned them.
Why cash and investments break the test
Most Vancouver owner-managed companies fail the 90% test for a simple reason: they have done well and kept the profits inside the company. Surplus cash beyond reasonable working capital, GICs, a stock portfolio, life insurance cash values, loans to shareholders, and a rental property held for investment are not assets used in an active business. Once those items exceed about 10% of total asset value, the shares are offside on the day of sale.
“Purifying” the corporation means moving non-business assets out before the sale, and early enough that the 50% test is also satisfied for the full 24 months. Common tools include paying a tax-free intercorporate dividend to a holding company out of safe income, repaying shareholder loans, paying down business debt with idle cash, or purchasing business assets the company actually needs. Each of these has its own rules. A holding company also keeps investment income away from the operating company, which matters for the passive income grind on the small business deduction.
Reductions that shrink the claim
Meeting the QSBC tests does not guarantee the full deduction. CRA’s Form T657 walks through several reductions:
Interest you paid to buy the shares of your own company, or dividends you chose not to take because you drew salary instead, both change the CNIL. A CPA should run the T936 calculation before an offer is signed, because paying yourself a dividend in the year of sale can sometimes clear a CNIL balance that would otherwise cost far more.
A Vancouver example with numbers
Elena founded a BC consulting company in 2012 for $100 of share capital. In 2026 an arm’s-length buyer offers $1,500,000 for her shares. The company holds modest working capital and no investment portfolio, so the shares meet the QSBC tests, and Elena has never claimed the exemption or built up a CNIL balance. Her taxable income is already in the top BC bracket.
| Item | Without exemption | With exemption |
|---|---|---|
| Capital gain ($1,500,000 − $100) | $1,499,900 | $1,499,900 |
| Exemption claimed | $0 | $1,275,000 |
| Gain still taxable at 50% | $1,499,900 | $224,900 |
| Personal tax at BC’s top 26.75% effective rate on capital gains | ≈ $401,200 | ≈ $60,200 |
| Approximate saving | ≈ $341,000, before any AMT timing effect | |
If Elena’s spouse had also owned shares for at least 24 months, or a family trust had held shares for adult beneficiaries, each of them could claim their own exemption on their share of the gain. Multiplying the exemption this way is legitimate, but it must be set up years in advance, and the TOSI rules and attribution rules need to be reviewed with the structure.
Share sale or asset sale?
The exemption is available only when you sell shares. If the buyer instead purchases the company’s equipment, goodwill, and customer list, the corporation realizes the gain, the exemption does not apply, and you face a second layer of tax when you take the proceeds out. That is why sellers almost always prefer a share sale and buyers usually push for assets. The trade-offs are covered in our guide to an asset sale vs share sale. If an asset sale is unavoidable, the non-taxable half of the corporation’s capital gain still flows into the capital dividend account and can come out tax-free.
How to prepare a corporation for the exemption
Value the balance sheet at fair market value
List every asset at what a buyer would pay, not at cost. Flag cash beyond working capital, investments, insurance cash values, shareholder loans, and real estate not used in the business.
Fix the ratio at least two years out
Move or use non-business assets so the company is above 50% now and can reach 90% at closing. Safe-income dividends to a holding company and debt repayment are the usual routes.
Confirm ownership history
Check the share register for the 24-month holding period, including any transfers to a spouse, children, or a trust, and whether those people are related for tax purposes.
Model CNIL, ABILs, and AMT
Run Form T657 and T936 on the expected gain. If AMT applies, plan salary or dividends in the following years so the AMT credit is actually recovered.
Consider a capital gains reserve
If the buyer pays over several years, a reserve can spread the gain over up to five years. The exemption is claimed as each portion is brought into income.
Common lifetime capital gains exemption mistakes
Assuming an old company qualifies
Age of the company is irrelevant. A 20-year-old business with 30% of its value in investments fails the 90% test on the day of sale.
Purifying too late
Moving investments out the month before closing may satisfy the 90% test but leaves the 24-month 50% test unmet if the ratio was below 50% earlier.
Ignoring the CNIL balance
Years of interest deductions on borrowed money can leave a CNIL that erases a large part of the deduction. It is fixable, but only with time.
Selling assets instead of shares
Accepting an asset deal without pricing in the lost exemption can cost hundreds of thousands of dollars. Negotiate the structure, not just the price.
When professional CPA advice becomes useful
Speak with a CPA as soon as a sale is a possibility within the next three years, when a buyer or competitor first raises the topic, when the company starts holding investments, or when you want to bring a spouse or family trust into the share structure. The exemption interacts with corporate purification, the small business deduction, TOSI, and the alternative minimum tax, and each of those has its own deadlines. This is core business sale and purchase advisory work, supported by corporate tax planning and personal tax planning for the year of the sale.
Frequently asked questions
Planning to sell your company in the next few years?
J. Wang Chartered Professional Accountant tests your shares against the QSBC rules, plans the purification, and models the lifetime capital gains exemption, CNIL, and AMT before you sign.
