Lifetime Capital Gains Exemption Explained
The C$1,275,000 exemption (2026), the qualifying tests, the CNIL trap, and its use before a move
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The lifetime capital gains exemption lets a Canadian resident exclude capital gains on qualified small business corporation shares and qualified farm or fishing property up to a lifetime limit — C$1,250,000 from June 25, 2024, indexed to C$1,275,000 for 2026. The shares must meet holding-period and active-asset tests. It's a key tool for business owners, including before a move.
On this page
Qualifying small business corporation shares
| Test | Requirement |
|---|---|
| At the sale | A Canadian-controlled private corporation with 90 percent or more of its assets (by fair market value) used in an active business in Canada |
| 24-month holding | Not owned by anyone other than the individual or related persons for 24 months before the sale |
| 24-month asset test | More than 50 percent of assets used in an active business in Canada throughout those 24 months |
Companies with large investment portfolios often fail the tests — "purifying" (moving passive assets out) before a sale is common.
Traps
| Trap | Effect |
|---|---|
| Cumulative net investment loss (CNIL) | Investment expenses such as interest in excess of investment income (since 1988) reduce the deduction available |
| Allowable business investment losses | Previously claimed ABILs reduce it |
| Alternative minimum tax | 30 percent of a gain sheltered by the exemption is included in AMT income, so a large claim can trigger AMT (the AMT guide) |
| Residency | Must be resident in Canada throughout the year — someone resident for part of the year and throughout the year before or after is treated as meeting this, so the departure year generally qualifies |
Before a move to the U.S.
The departure tax deems a sale of private company shares when a person emigrates; the exemption can shelter that deemed gain if the shares qualify at departure (someone resident throughout the prior year is treated as resident throughout the year they leave) — a key reason to plan the company's assets before the move (the moving a business guide). The United States doesn't recognize the exemption; the Article XIII(7) election steps up U.S. basis to the departure value so the exempt Canadian gain isn't taxed later in the U.S. (the Article XIII(7) guide).
Frequently asked questions
What is the lifetime capital gains exemption?
An exclusion of up to C$1,275,000 (2026) of capital gains on qualified small business shares and farm or fishing property — claimed as a deduction of half that amount (C$637,500) against taxable capital gains.
Do my company's shares qualify?
Only if at least 90 percent of its assets are active business assets at the sale and the 24-month tests are met.
Can I use it when I leave Canada?
Potentially, on the departure tax's deemed sale of qualifying shares — plan before moving.
Does the U.S. recognize it?
No — but the Article XIII(7) election can step up U.S. basis so the gain isn't taxed later in the U.S.
Official sources
The Canada Revenue Agency explains: “Under proposed changes, for 2025, the lifetime capital gains exemption (LCGE) is $1,250,000 for dispositions of qualifying property. This means that the maximum capital gains deduction for qualifying properties is $625,000 (50% of $1,250,000).” — Canada Revenue Agency, Line 25400 – Capital gains deduction, https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-25400-capital-gains-deduction.html
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our Canadian Tax Desk handles lifetime capital gains exemption planning — share purification, CNIL review, and departure-year use. See pricing or book a call.
Cross-border taxes, handled in one place
U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
Book a free fit call