The lifetime capital gains exemption (“LCGE”) is an important one for our readers to be aware of. It is an incentive by the federal government to encourage entrepreneurs to build up a business, and when they sell it, the first $1.25 million of the profit that they have earned by building up the business is tax free. This generally applies to both farms, fishing properties and most commonly to qualified small business corporations, QSBC shares. Specifically, LCGE is generally only available when selling QSBC shares. This is work that must be guided by experienced Will and Estate Lawyers.
To determine if the QSBC shares qualify for the LCGE and to save a significant amount of tax, various tests must be met.
- 90% of the assets are used principally in an active business carried on in Canada by the company.
- The QSBC shares must be owned by a person for two years immediately before the shares sale and 50% of the assets of the company must be used for an active business carried on in Canada, but at the time of the sale it must meet a 90% test. That is that 90% of the assets were used principally in an active business carried on in Canada by the company.
This is a relatively complicated tax question, but it is an important one as significant tax can be saved using such a large tax deduction. Clearly one will require the guidance of experienced tax and legal advisors to take advantage of this.
One can use the LCGE up to the maximum amount, which currently is $1.25 million, however that figure is indexed to inflation so one may not have used it up in the past. This again requires the executor, their lawyer and tax advisors to investigate clearly.
