Lifetime Capital Gains Exemption in Canada: The 2026 Amount and the QSBC Tests

The lifetime capital gains exemption is the largest single tax provision most Canadian business owners will ever use. It shelters the gain on a sale of qualifying shares, once per person, over a lifetime.

Two things have to be right before anything else in this article is useful.

The number changes every January. The exemption is indexed to inflation, and CRA publishes the figure for each year in its indexation table. For 2026 it is $1,275,000. For 2025 it was $1,250,000.

The exemption and the deduction are different numbers. The exemption is the amount of gain covered. The deduction you actually claim on your return is half of that, because only half of a capital gain is taxable in the first place. CRA states this directly on line 25400.

Figures from CRA’s indexation table. Indexation was paused when the exemption jumped to $1.25 million for dispositions on or after 25 June 2024, and CRA notes that it resumed in 2026. Two consequences follow. Anything you read quoting a flat $1.25 million is describing 2025 and 2024, not the year you are probably selling in. And CRA still labels the increase a proposed change, because the enabling legislation was tabled as a Notice of Ways and Means Motion rather than passed. Confirm the current year’s figure before you sign anything.

One more figure, because it is the other half of every calculation here. The capital gains inclusion rate is one-half. CRA’s T4037 guide gives it as one-half for every year from 2001 to 2025. The proposed increase to two-thirds never took effect, and the full story of that reversal is worth reading if anyone has shown you a projection built on two-thirds.

What actually makes a share a QSBC share

CRA sets out three conditions in its definitions for capital gains. All three must be met. Most articles describe the first one and stop.

A small business corporation, in CRA’s own words, is a Canadian-controlled private corporation in which all or most, meaning 90% or more, of the fair market value of its assets are used mainly in an active business carried on primarily in Canada, or are shares or debt of connected small business corporations.

Note the asymmetry, because it is the whole game: 90% at a single instant, more than 50% continuously for two years. The 90% test is the one that gets failed, and it gets failed by a balance sheet that looks healthy to the owner.

The 1988 rule that quietly resets your clock

This one costs people the exemption and almost nobody mentions it. Where a corporation issued shares after 13 June 1988 to you, to a partnership you belong to, or to a person related to you, CRA treats those shares as having been owned by an unrelated person immediately before they were issued. The 24-month ownership clock therefore starts at issuance.

CRA lists exceptions: shares issued as payment for other shares, shares issued as a stock dividend, and shares issued in connection with a transfer to the corporation of 90% or more of the assets used in an active business.

If you have recently reorganised, issued shares to a family trust, or brought in a new shareholder, assume the clock restarted and check the date on the share certificate rather than the date you started the business.

What breaks the 90% test

Non-active assets are the problem, and profitable businesses accumulate them without anyone deciding to.

• Excess cash. Working capital counts as an active business asset. A war chest generally does not. There is no bright line, which is exactly why you want the judgment made in advance and documented
• A marketable securities portfolio built out of retained profits
• Real property rented to third parties, as distinct from premises the business occupies
• Corporate-owned life insurance with a cash surrender value
• Shareholder loans and loans to related persons that are not business loans
• A dormant subsidiary that no longer carries on an active business

A corporation that has been profitable for a decade and left the money inside is very often offside on the day an offer arrives. That is the normal case, not an edge case.

Purification, and why it cannot be done at closing

Purification means moving non-active assets out so the corporation meets the tests.

Two warnings matter more than the list.

The 50% asset test is continuous. You cannot purify on the morning of closing and satisfy it, because it looks back across the whole 24 months. Purification belongs to a plan that started before the sale was contemplated.

Purification has its own tax cost. Paying cash out triggers personal tax today to protect an exemption you may use in three years, or never. Model it.

The two grinds nobody budgets for

The headline figure is a ceiling, not an entitlement. Your actual deduction comes out of Form T657, and two things reduce it.

Cumulative net investment loss. If you had investment income or investment expenses in any year from 1988 onward, CRA requires Form T936 alongside T657, and states plainly that a CNIL balance may affect the allowable amount of your capital gains deduction. Owners who have carried interest on investment loans for years are the ones who get surprised.

Prior claims. It is a lifetime limit. Anything you or a predecessor transaction already used is gone, and the balance is checked against your own filing history.

Both are computable today from returns you already filed. Neither should be discovered during the year of sale.

The AMT bill on a fully sheltered gain

The exemption removes regular tax on the sheltered gain. It does not remove alternative minimum tax.

Under the regime rebuilt by Budget 2023 for tax years beginning after 2023, 30% of capital gains eligible for the lifetime capital gains exemption are included in the AMT base, and the AMT rate is 20.5%. Ordinary capital gains go in at 100%. Only half of most non-refundable credits are allowed against it.

The 2025 threshold is CRA’s own figure on line 41700. The 2026 bracket figure is from the indexation table. A fully sheltered seven-figure gain clears either threshold comfortably, so treat AMT as payable and work out how much.

It is recoverable, in principle, against regular tax over the following seven years to the extent regular tax exceeds the minimum in those years. Two problems with relying on that. It is a cash outflow in the year you least want one. And recovery needs enough regular tax later, which an owner who sells and then draws a modest income may never have.

Where the exemption does not apply at all

A trust is a partial exception. It cannot claim the deduction itself, but it can allocate and designate the taxable gain to a beneficiary who then claims it on their own return.

Getting paid over time

Where the price arrives over several years, a capital gains reserve brings the gain into income as the proceeds arrive. CRA sets the general maximum at four years, so the gain is recognised over five. A nine-year reserve is available in specific cases, spreading the gain over ten years, including a transfer of QSBC shares to your child and a qualifying business transfer.

Two restrictions worth knowing early. You cannot claim a reserve if you were not resident in Canada at the end of the year, and you cannot claim one if you sold the property to a corporation you control in any way.

That second restriction bites on crystallisation, where an owner triggers a gain deliberately while the shares still qualify, usually through a section 85 transfer to a holding company, claims the exemption then, and locks in a higher cost base. It is real insurance against a future year in which the shares no longer qualify. It also costs professional fees, exposes you to AMT in the year you crystallise, and forfeits the benefit of a higher indexed limit later.

Multiplying it across a family

The exemption is per individual, so a spouse and adult children who hold shares can each claim their own. On a $3 million sale that is the difference between a large tax bill and almost none. It has to be set up properly and early.

• Shares are usually held through a family trust, so beneficiaries can be determined at the time of sale
• Tax on split income has to be tested for every recipient. Assume it is in scope until an exclusion is confirmed
• Value must genuinely have accrued to those shares. Issuing shares to a spouse the month before closing does not move a gain that accrued over fifteen years, and it invites scrutiny

The freeze that normally accompanies this is covered in the estate freeze.

If you also file a US return

The exemption is Canadian relief against Canadian tax. It does nothing on a Form 1040. A US citizen living in Canada still reports the gain to the IRS, and the United States runs a separate regime for small business stock: the IRS notes in Topic no. 409 that the taxable part of a gain on section 1202 qualified small business stock is taxed at a maximum 28% rate for taxable years beginning in 2025.

The practical trap is that sheltering the Canadian tax leaves less Canadian tax to credit against the US bill. If this is you, the sale needs planning on both sides at once, alongside your cross-border filing obligations.

What to do, and when

The one thing to take from this

Eligibility is decided by the state of your balance sheet 24 months before an offer you have not yet received. Everything about this provision rewards owners who checked early and punishes owners who checked at closing.

If you own a Canadian-controlled private corporation and a sale is plausible in the next few years, a test of the QSBC conditions against your current balance sheet is a short piece of work, and it is the only version of this question that can still be answered usefully.