What is the lifetime capital gains exemption?
When you sell something for more than you paid, the profit is a capital gain. Normally half of that gain is added to your income and taxed. The LCGE lets a Canadian resident earn a set amount of gains on certain property completely tax-free, once in their lifetime.
On the tax return, it shows up as the capital gains deduction on line 25400. The deduction is half the exemption, because only half of a capital gain is taxable to begin with. A $1,250,000 exemption means a deduction of up to $625,000.
Is the LCGE only for corporations, or for individuals too?
It's for individuals only. That surprises many business owners, because the exemption is tied to shares of a corporation. The corporation doesn't claim anything. The person who owns the shares and sells them claims it on their personal return.
- Individuals: can claim it if they were resident in Canada for the whole year of the sale (or for part of that year and all of the year before or after).
- Spouses and adult children: each has their own lifetime limit if they own qualifying shares.
- Family trusts: a trust can't claim it, but it can designate the gain to Canadian-resident beneficiaries, who each use their own limit.
- Corporations and holding companies: can't claim it. If your holding company sells your operating company's shares, there is no LCGE. Selling the holding company's shares personally can qualify, if they pass the QSBC tests.
- Non-residents: can't claim it.
What property qualifies?
Only three kinds of property qualify, and they share one lifetime limit.
QSBC shares
Shares of a Canadian-controlled private corporation that runs an active business mainly in Canada.
Qualified farm property
Farmland and buildings, or shares and interests in a family farm corporation or partnership, that meet the use tests.
Qualified fishing property
Fishing property, vessels, or shares and interests in a family fishing corporation or partnership.
One limit, not three. If you use $400,000 of your exemption on farm land, you have $850,000 left for business shares later.
LCGE limits by year
| Year of sale | Lifetime exemption | Maximum deduction (line 25400) |
|---|---|---|
| 2024, before June 25 | $1,016,836 | $508,418 |
| 2024, after June 24 | $1,250,000 | $625,000 |
| 2025 | $1,250,000 | $625,000 |
| 2026 | Indexed to inflation | Half the 2026 limit |
Budget 2024 raised the limit to $1,250,000 for sales after June 24, 2024. Indexing to inflation starts again in 2026. Confirm the exact 2026 figure on CRA Form T657 before you file.
The three tests your business shares must pass
- At the time of sale: 90% or more of the company's assets, by fair market value, must be used in an active business carried on mainly in Canada, or be shares or debt of other qualifying small businesses.
- For the 24 months before the sale: more than 50% of the company's assets must meet the same active-business test.
- Ownership for the 24 months before the sale: nobody other than you or a person related to you can have owned the shares.
Surplus cash, investment portfolios and rental real estate held inside the company can fail the tests. Moving those assets out ahead of a sale, often called purifying the company, is a common planning step. The 24-month clock means it has to be planned early.
Every scenario at a glance
This is the question most people actually have: "I made a profit. Does the exemption cover it?"
| Where the gain came from | LCGE? | Other relief | How the gain is taxed |
|---|---|---|---|
| Shares of your private small business (QSBC) | Yes | None needed | Tax-free up to the lifetime limit; 50% taxable above it |
| Qualified farm or fishing property | Yes | None needed | Tax-free up to the lifetime limit; 50% taxable above it |
| Private shares that fail the QSBC tests | No | Purify the company and requalify later | 50% of the gain |
| Your home (principal residence) | Separate rule | Principal residence exemption, no dollar cap | Tax-free for years designated as your principal residence |
| Cottage or second home | Separate rule | Can be designated instead of your home for some years | 50% of the part not covered |
| Rental or investment property | No | None | 50% of the gain, plus 100% of CCA recaptured |
| Housing sold within 365 days | No | Life-event exceptions only | 100% as business income; losses count as nil |
| Vacant land held as an investment | No | None | 50%, or 100% if you're in the business of dealing in land |
| Stocks, ETFs, mutual funds (non-registered) | No | None | 50%, or 100% if trading is a business |
| Cryptocurrency | No | None | 50%, or 100% if trading or mining is a business |
| Investments inside a TFSA | Not needed | Gains are tax-free | Not taxed |
| Investments inside an RRSP or RRIF | Not needed | Gains are tax-deferred | Withdrawals are taxed in full as income |
| Anything sold by a corporation | No | Tax-free half goes to the capital dividend account | 50% of the gain, at corporate investment rates |
No limit doesn't mean no tax. For rental property, stocks and crypto, there's no cap on how much you can sell, but there's no exemption either. Every dollar of gain is reported, and half of it is taxed.
Examples
These examples use a 43.41% marginal tax rate, a typical Ontario rate for middle-to-upper incomes, unless noted. Your own rate depends on your province and total income.
| Capital gain | $200,000 |
| LCGE | Not available |
| Taxable (50%) | $100,000 |
| Estimated tax | $43,410 |
Any CCA claimed on the condo is added back to income in full as well.
| Gain on QSBC shares | $2,000,000 |
| Each spouse's share | $1,000,000 |
| Sheltered by two LCGEs | $2,000,000 |
| Estimated regular tax | $0 |
Alternative minimum tax (AMT) may still apply in the year of sale. See below.
| Capital gain | $100,000 |
| LCGE | Not available |
| Taxable (50%) | $50,000 |
| Estimated tax | $21,705 |
The same gain inside a TFSA would be tax-free.
| Profit | $80,000 |
| Flipping rule | 100% taxable |
| Taxable | $80,000 |
| Estimated tax | $34,728 |
Selling because of a life event such as job loss or separation is an exception.
Principal residence vs. the LCGE
Your home is covered by the principal residence exemption, a separate rule with no dollar limit. A family (you, your spouse and children under 18) can designate only one property for each year. If you own a home and a cottage, you have to choose which one covers each year. The other property's gain for those years is taxable.
You must report the sale of your home on Schedule 3 and Form T2091, even when the whole gain is exempt.
What can reduce your exemption or add tax
- Alternative minimum tax (AMT): since 2024, 30% of a gain sheltered by the LCGE counts toward AMT. A large claim can trigger AMT in the year of sale. You can recover it against regular tax over the next 7 years.
- Cumulative net investment loss (CNIL): if your investment expenses, such as interest on investment loans, have been more than your investment income since 1988, your claim is reduced.
- Business investment losses: allowable business investment losses you claimed earlier reduce the exemption available.
- Residency: you must be resident in Canada for the year of sale. If you're moving abroad, plan the sale before you leave.
Capital gains at death, and how families pay the bill
When someone dies, the CRA treats all their capital property as sold at fair market value. The LCGE and principal residence exemption still apply on the final return. A cottage that has grown in value for 30 years, a rental property, or a non-registered portfolio can still leave a large tax bill, often due before the estate can sell anything.
Example: a family cottage with a $400,000 gain and no principal residence years left. Half the gain, $200,000, is taxable. At Ontario's top rate of 53.53%, that's about $107,000 in tax on the final return. Many families buy permanent life insurance for that amount, so the cottage passes to their children without having to be sold.
Get your personal capital gains illustration
Pankaj Bhatia uses a private Capital Gains Exemption Calculator in client meetings. It works out your own numbers: which exemption applies, how much of your lifetime limit is left, the tax with and without planning, and the tax your estate would owe at death.
- Business shares, farm property, rental property, cottages, investments and crypto
- Spouse and family trust scenarios
- Life insurance needed to cover the tax at death
The calculator is for clients only. Contact Pankaj Bhatia for an illustration based on your numbers.
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Frequently asked questions
Is the lifetime capital gains exemption only for corporations?
No. Only individuals can claim the LCGE. A corporation can't claim it. The individual claims it on line 25400 of their personal tax return when they sell qualified small business corporation shares or qualified farm or fishing property. A trust can pass a qualifying gain to Canadian-resident beneficiaries, who claim it themselves.
What is the lifetime capital gains exemption limit for 2025 and 2026?
The CRA lists the LCGE at $1,250,000 for 2025, which means a maximum deduction of $625,000. The $1,250,000 limit started on June 25, 2024. Before that it was $1,016,836. The limit is indexed to inflation from 2026, so confirm the 2026 figure on CRA Form T657 before you file.
Does the lifetime capital gains exemption apply to rental property?
No. Rental and investment real estate never qualify for the LCGE. Half of the gain is taxable, and any capital cost allowance you claimed is added back to income in full. There is also no cap on how much rental property you can sell.
Can I use the LCGE on stocks or ETFs in a non-registered account?
No. Public company shares, ETFs, mutual funds and cryptocurrency don't qualify. Gains are taxed at the 50% inclusion rate. If the CRA decides you're trading as a business, all of the profit is taxed.
What happens if I sell a house within 365 days?
Under the residential property flipping rule, the profit on housing owned for less than 365 consecutive days is taxed in full as business income, and a loss counts as nil. The exceptions are for life events such as death, separation, a new child, disability, a job move or job loss, insolvency, or disaster.
Can my spouse and I both claim the LCGE?
Yes. Each Canadian-resident individual has their own lifetime limit. If both spouses own qualifying shares, a family could shelter up to about $2.5 million on one business sale. Adult children and family trust beneficiaries can increase that further.
Is my principal residence covered by the LCGE?
No. Your home is covered by a separate rule, the principal residence exemption. It has no dollar limit, but a family can designate only one property for each year. You still have to report the sale on your tax return.
Can the LCGE be used at death?
Yes. At death, capital property is treated as sold at fair market value, and any unused LCGE can shelter gains on qualifying shares or farm and fishing property on the final return. Gains on cottages, rental properties and investments are taxed unless they pass to a spouse. Many families use permanent life insurance to pay that tax.
Sources
This page is general education, not tax or legal advice. Tax rules change, and your situation may differ. Pankaj Bhatia is a licensed financial advisor and insurance broker, not a tax accountant. Confirm your tax position with a CPA before you sell.