Get Started
Client Login


The Biggest Reason to Not Rush the Sale of a Business


Statistics show that Canadians between 50 and 64 own the highest percentage of small and medium-sized businesses. Based on these stats, it's apparent to me that a significant shift is taking place as many of these owners are either exiting or looking to exit very soon. And this trend has only been accelerated as a result of the pandemic.

However, most business owners who don't start the planning process soon enough might miss out on $913,630+ of tax-free proceeds due to the lifetime capital gains exemption (LCGE). Data from the Canadian Federation of Independent Businesses (CFIB) suggests that over half the business owners today have done no formal succession planning, which means many business owners will pay way more tax than needed when they finally exit.

What is the Lifetime Capital Gains Exemption?

The LCGE provides Canadian resident individuals with a significant tax benefit when disposing of shares of a small business corporation. Upon selling shares, 50% of the 𝗟𝗖𝗚𝗘 ($913,630/2 = $456,815) is used as a deduction against the taxable portion of an individual's capital gain on the shares. Through proper planning, this exemption may even be able to be multiplied using tools like family trusts etc.

Here's an example: if you started a business from scratch (for ease of math, let's assume your cost was $1) and sell it later for $1,000,000. Your capital gain on the business is $999,999 ($1,000,000- $1). Half of this gain is taxable, meaning a taxable gain of $499,999.

However, the 𝗟𝗖𝗚𝗘 provides you with a deduction worth $456,815. In this example, instead of paying tax on $499,999, the 𝗟𝗖𝗚𝗘 means the seller would only pay tax on $43,184 ($499,999 - $456,815). For someone in the top tax bracket, this is the difference between paying approximately $250,000 in tax or $21,500.

How does a business qualify for the Lifetime Capital Gains Exemption?

Here's the catch. To qualify for the LCGE, a corporation needs to be considered pure. For a corporation to be considered pure, it must meet three tests:

  • Small Business Corp Test - 90% of business assets must be used in active business carried out in Canada at the time of sale
  • Holding Period Test - The shares sold must be owned by a shareholder or related person for the 24 months prior to the sale
  • The Basic Asset - For the 24 months before the sale, more than 50% of the corps assets must have been used for active business

Corporations are often not considered pure when the value of passive assets within the corporation is too high (think corporate retirement portfolios or just excess cash that's not needed for operations).

Ways you can purify your corporation?

Several strategies can help owners to begin purifying their corporations. Some of these include:

  • Selling passive assets
  • Paying salaries or dividends
  • Paying accounts payable
  • Buying inventory
  • Investing in permanent insurance policies
  • Utilizing an Individual Pension Plan


It's unlikely that any one strategy by itself will be enough to purify a successful business. The odds are a combination of these will need to be used. What combination that is will ultimately depend on your unique circumstances. Because of this, it's essential to work closely with your accountant, legal, and financial planning professionals well in advance of a sale. Together they will help you to determine what can or needs to be done before a sale, ensuring you maintain your access to the LCGE. It will save you an enormous amount of tax, especially if you're in a position to be able to multiply the LCGE using other family members.

Brandt Butt, Portfolio Manager/Investment Advisor, CIM®

Brandt is a Portfolio Manager/Investment Advisor and part of an award-winning team at Endeavour Wealth Management with iA Private Wealth. Brandt’s focus is working with incorporated physicians and dentists between the ages of 35-45 who are lookingt o set themselves up on the right financial path in hopes of reaching a point where they are choosing to work, instead of having to.

This information has been prepared by Brandt Butt who is a Investment Advisor/Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained here in may not apply to all types of investors. The Investment Advisor/Portfolio Manager can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.



Recent Blogs View All >

Stop Celebrating Tax Refunds: Why It's Not a Win for Canadians

Here’s the scoop: Getting a tax refund essentially means you gave the government an interest-free loan!Think of what you could have...

May 21, 2024

Turn Your Portfolio Into A Monthly Payday

Would you like an extra payday every month, without needing to find another job or work any additional hours? It is probably safe to say most...

May 13, 2024

Capital Gains Inclusion Rate Changes Impacting Canadian Businesses & Professional Corporations

In the wake of the 2024 Federal Budget, Canadian business owners and incorporated professionals are bracing for significant shifts in the taxation...

May 6, 2024

Free GuidesView All >

Living Financially Free

Download your free guide to financial freedom.

Is Your Retirement Protected?

Download our free guide to learn how best to protect yourself, your family, and your retirement.

The Power Of The Personal Pension Plan

Download your free guide to learn how you can protect your retirement savings with a Personal Pension Plan.

3 Methods To Not Run Out Of Money

Download your free guide to help ensure you don’t run out of money.

4 Mistakes People Make With Their First Million

Download your free guide to learn how to ensure your portfolio and plan stay on track.

want to achieve YOUR FINANCIAL goals?