Lifetime Capital Gains Exception (LCGE) is restricted to Canadian tax residents (you cannot be a non-resident), in which a portion of any capital gains made on the sale of Qualifying Small Business Corporation (QSBC) shares is exempt from any capital gains tax. As of 2016 this amount is ~$800,000 and is adjusted each year based on the inflation index.
LCGE does not apply to the sale of assets in a business, only at a personal level on deposition of QSBC shares.
Basic example of LCGE:
Over several years you have built a successfully property company which you originally invested $100,000. 20 years later you decide to now sell your shares in your QSBC for $900,000. Doing the math, your original investment and shares have grown $800,000 in value. Upon deposition of these shares to an eligible buyer (restrictions on foreign investors purchasing shares in QSBC's) you can claim the $800,000 as a capital gains exemption.
LCGE might sounds simple, but there are a lot of factors in determining if you, your assets or your company is eligible to take advantage of the tax breaks.
General rules for LCGE:
- Must be Canadian Controlled Private Corporate (CCPC) shares.
- At the time of sale, 90% of the businesses assets must be active.
- At the time of sale, 50% of the QSBCs assets must have been used in generating active business income for the past 24 months
- Shares in a corporation must have been held for at least 24 months without change in ownership
- Only eligible properties qualify for LCGE upon deposition - Farm property, fishing property or a person selling shares in a Qualifying Small Business Corporation (QSBC)
Purification and Crystallization:
Crystallization - When the LCGE is used before the sale of a company used for long term estate planning to ensure the LCGE is maintained by "triggering a capital gain". Examples of this would be planning family trusts, section 85 roll over with an elected transfer price, section 86 reorganization or transferring shares to a spouse.
Purification - When assets are removed from a business and transferred/sold to another business which are inactive to ensure 50% of the assets are being used for generating active income in the past 24 months or 90% of the assets are used for active business income at the time of sale. Purification can generally be avoid with early estate planning to ensure that active and passive assets are split into different holding companies. Butterfly freeze/transaction is a complex approach which involves the freezing and splitting of assets between two new companies.