Lifetime capital gains exemption 2026: what it shelters when you sell your business
The single largest tax break available to a Canadian owner shelters $1,275,000 of gain in 2026. Whether your shares qualify for it is decided about two years before the sale.
The lifetime capital gains exemption lets an owner shelter $1,275,000 of gain in 2026 on a sale of qualified small business corporation shares. The limit rose to $1.25 million on June 25, 2024, and indexation resumed in 2026. It applies to a share sale, and the corporation must pass asset tests at the sale and over the prior 24 months.
What it is
The lifetime capital gains exemption, often shortened to LCGE, is $1,275,000 in 2026. When you sell shares of your corporation for more than you paid for them, the difference is a capital gain and half of it is taxed as income. The exemption lets you leave up to that amount of gain out of your income entirely. Each individual has a limit of their own, so two partners selling one company who each hold qualifying shares can each shelter a gain up to it.
The limit rose to $1.25 million for sales on or after June 25, 2024, and it stayed at that figure through 2025. Indexation to inflation resumed in 2026 at 2.0 percent, which brought the limit for qualified small business corporation shares to $1,275,000. The Canada Revenue Agency explains how the deduction is claimed on your return. The March 2025 announcement that cancelled the two thirds inclusion rate kept this increase, as the rule changes of 2024 to 2026 record.
People often search for it as the one time capital gains exemption. It is a lifetime total, and whatever you have claimed on earlier sales comes off it. Most owners reach their sale with the whole amount still available, which is why it usually goes to the one sale that matters.
The limit by year
| Year of the sale | Limit on qualified small business corporation shares |
|---|---|
| 2023 | $971,190 |
| 2024, sales before June 25 | $1,016,836 |
| 2024, sales from June 25 | $1,250,000 |
| 2025 | $1,250,000 |
| 2026 | $1,275,000 |
The figures are from the CRA’s indexation table for personal tax amounts. The year 2024 carries two limits because the increase took effect partway through it, so the date of closing decides which one applies.
What it is worth
Half of a capital gain is taxable, so the 2026 limit takes $637,500 of taxable gain out of your income. What that saves depends on your marginal rate, which your province and your other income set.
Take an illustration. An owner sells the shares of a qualifying company for $2 million, the shares cost a nominal amount, and the arithmetic uses a combined rate of 50 percent, assumed here for round numbers.
| Step | Whole gain taxed | Exemption claimed |
|---|---|---|
| Capital gain on the shares | $2,000,000 | $2,000,000 |
| Amount sheltered | $0 | $1,275,000 |
| Gain left to tax | $2,000,000 | $725,000 |
| Taxable half | $1,000,000 | $362,500 |
| Tax at the assumed 50 percent | $500,000 | $181,250 |
The exemption saves $318,750 in this illustration. Alternative minimum tax can add a separate bill in the year of the sale, and your accountant will put both calculations side by side.
That is one owner. Where a spouse or an adult child genuinely owns qualifying shares, each has their own exemption, and a family can shelter more than one limit on a single sale. The word genuinely is carrying a lot of weight in that sentence, and it is the reason the planning takes years. A sale to an employee ownership trust carries a separate exemption of up to $10 million per transfer, which the CRA says can be claimed alongside this one.
It only works on a share sale
The exemption applies to a gain on shares. If your corporation sells its assets instead, the corporation makes the gain and the corporation pays the tax, so the gain falls outside the exemption.
Buyers generally prefer to buy assets, for reasons set out in Share sale or asset sale. The exemption is the main reason sellers push the other way, and the size of it is usually the whole negotiation about structure. The overview of tax when you sell a business in Canada shows how far apart the two bills can land.
The three tests
Shares qualify if the corporation and your holding of them pass three tests. Your accountant will apply them to your facts; this is what they are.
- 01At the sale. The corporation is a Canadian controlled private corporation, and all or substantially all of its assets, which the CRA reads as 90 percent or more by value, are used in an active business carried on mainly in Canada.
- 02Over the 24 months before the sale. More than 50 percent of the assets, by value, were used in an active business throughout that period.
- 03Your holding. Only you or a person related to you owned the shares during the 24 months before the sale.
Where owners fail the tests
The asset tests are about what the corporation owns, and the usual problem is that it owns too much of the wrong thing. Cash beyond what the business needs counts as passive, and so do investments, a rental property or a loan to a shareholder.
A profitable business that has left ten years of retained earnings sitting in the corporation as investments can fail the 90 percent test at the sale. The remedy is to move those assets out, which is called purifying the company, and it has its own tax cost and its own timetable.
The 24 month test is why the fix needs a long lead time. A corporation purified the month before the sale passes the first test and may still fail the second.
The timetable
| When | What |
|---|---|
| Two years or more before the sale | Accountant reviews the tests against the corporation as it is. Purification and any family ownership set up. |
| One year before | Confirm the 50 percent test is being met through the look-back period. Keep surplus cash out. |
| At the letter of intent | Share sale confirmed as the structure, or the price adjusted for the tax cost of an asset sale. |
| At closing | The 90 percent test is applied to the balance sheet on the day. |
Two things that are often misunderstood
- A sheltered gain can still produce tax. Alternative minimum tax can apply in the year of the sale, and a gain above the limit is taxed in the ordinary way. Your accountant will model both.
- The exemption needs shares, so a sole proprietorship or a partnership falls outside it. An owner who still runs the business unincorporated has a decision to make, and that decision carries a 24 month clock.
What to do this week
If a sale is anywhere in your next three years, ask your accountant one question: do my shares qualify today, and what would it take to make them qualify? The answer is a list, and every item on it takes longer than you would like.
The gain you would shelter depends on what the business is worth. A free Quick AI valuation gives you a working figure to take into that conversation.
This piece describes the rules in general terms and is for information only. The figures are the Canada Revenue Agency’s as of October 2026; check the current limit and take advice on your own facts.
Questions owners ask
- How much is the lifetime capital gains exemption in Canada?
- In 2026 the limit for qualified small business corporation shares is $1,275,000 of capital gain. It was $1.25 million for sales from June 25, 2024 through 2025, and indexation to inflation resumed in 2026. The Canada Revenue Agency publishes each year’s figure.
- Does the exemption apply if I sell the assets of my business?
- The exemption applies to a gain on qualified shares, so a share sale is the structure that uses it. On an asset sale the corporation sells and the gain is taxed inside it. This is the main reason sellers prefer share sales and buyers often prefer asset sales.
- Can my spouse also use the exemption?
- Each individual has their own exemption. Where a spouse or adult child genuinely owns qualifying shares, the family can shelter more than one limit on a single sale. The ownership has to be real and in place well before the sale, which is a conversation for an accountant and a lawyer.
- Is the lifetime capital gains exemption a one time exemption?
- It is a lifetime limit that you can use across more than one sale, and each claim reduces what remains. In 2026 the total is $1,275,000 of gain on qualified small business corporation shares. Most owners reach the sale of their company with the full amount still available.