Canada: Crystallizing The Lifetime Capital Gains Exemption – A Toronto Tax Lawyer Analysis

Last Updated: October 2 2018

Introduction - What is the Lifetime Capital Gains Exemption?

The lifetime capital gains exemption allows Canadian taxpayers to sell certain kinds of shares called qualified small-business-corporation (QSBC) shares as well as qualified farming and fishing properties without paying tax on the capital gains up to a set amount. The lifetime capital gains exemption is currently $848,252 in 2018 for dispositions of QSBC shares and is indexed to account for inflation annually. The lifetime capital gains exemption for qualified farming and fishing properties is the greater of the lifetime capital gains exemption for QSBC shares or $1,000,000. As the $1,000,000 amount is not indexed for inflation, once the indexed lifetime capital gains exemption that applies to QSBC shares exceeds $1,000,000, then the exemption for qualified farming and fishing properties will be equal to the exemption for QSBC shares.

Notably, the lifetime capital gains exemption amount is the amount of capital gains exempted. Because only 50% of a capital gain is taxable, the exemption is equivalent to an income exemption of $424,126. While the actual amount of tax an individual saves when using the lifetime capital gains exemption varies depending on their marginal tax rate, assuming the top marginal rate, an individual will save approximately $220,000 through the usage of the lifetime capital gains exemption. Call our top Toronto tax firm to learn more about the benefits and use of the lifetime capital gains exemption.

Qualifying for the Lifetime Capital Gains Exemption

Although the lifetime capital gains exemption can be very beneficial, it also has stringent rules as to when it is applicable. See our previous article for more details, but essentially there is an asset requirement, an ownership requirement, and a mixed asset-and-ownership requirement. To qualify as a QSBC, the corporation must be privately owned by an individual resident in Canada and no one other than that individual or a related person or partnership can have owned the share throughout the prior 24 months.

Furthermore, the assets of the corporation must be at least 90% principally used in an active business and at least 50% principally used in an active business for the previous 24 months. Farming and fishing properties have their own set of requirements which, in brief, require that the property be primarily used in a farming or fishing business throughout the prior 24 months, as well as require that the farm was not owned at any point over the prior 24 months by anyone other than the individual or his spouse, child, or parent, or certain partnerships or trusts, and that one of those listed people earned more gross revenue from the farming/fishing property than all other sources of revenue during that period. Speak to one of our expert Toronto tax lawyers to make sure your shares or property meet the tests for the lifetime capital gains exemption.

Crystallizing the Lifetime Capital Gains Exemption

Due to the fairly stringent requirements for the lifetime capital gains exemption, an individual may not be able to ensure that they meet all of the requirements when he decides to sell his shares of the company or his farming/fishing property as the case may be. For certain criteria such as the requirement that at least 90% of the assets of the corporation be principally used in an active business at the time of disposition of the QSBC shares, planning can be done on short notice to meet the test. Specifically, a common strategy called purification can be utilized, usually by incorporating a new holding company to hold at least 10% of the shares of the original corporation and then utilizing tax-free inter-corporate dividends to transfer any assets that are not principally used in an active business into the new holding company, allowing the original corporation to reach the 90% threshold. In some cases it may be possible to purify with a simple cash extraction.

However, several of the other requirements must be met for the preceding 24 months which means not much can be done in the short term to meet those tests. Furthermore, circumstances can change such as the corporation will no longer meet the asset requirements or the individual's shares can no longer be classified as QSBC shares. For example, the corporation's activities may change and cease to have an active business or the active business portion of the corporation will fall below the 50% or 90% requirements. Shareholdings might also change, such that the corporation is no longer Canadian controlled (i.e. other shareholders might sell their shares to non-Canadians such that the non-Canadians will own more than 50% of the shares), or that you might be considering renouncing your Canadian citizenship. In these circumstances, it may no longer be possible to fulfill the requirements for the lifetime capital gains exemption. In such a situation, the lifetime capital gains exemption can be crystallized beforehand, when the necessary tests are met, so that there is no longer any worry about meeting them in the future. There are various ways to crystallize the exemption, but ultimately they all boil down to triggering a capital gain on the QSBC shares through the use of a transaction or election. By triggering a capital gain and utilizing the exemption, the individual will increase their adjusted cost basis in whatever property he receives at the end of the transaction. The transaction is typically controlled to ensure that the capital gain being triggered is no more than the full capital gains exemption. With the adjusted cost basis increased on the property, the property can then be sold at any point in the future and the individual will have a tax savings at that point equal to the capital gains exemption amount.

To illustrate how this works, assume an individual with QSBC shares worth $800,000 that he received when the corporation was just started, so the shares have a cost basis of $1. If he sold those shares, he would normally have an income inclusion of $399,999.5 and pay approximately $200,000 in tax. If he qualified for the lifetime capital gains exemption, that entire gain would be exempt and no tax would need to be paid. To crystallize, the individual can trigger the capital gain and use the exemption to increase his cost basis to $800,000. If at a future date he decided to sell those shares and they were still worth at least $800,000, then he would realize no capital gain on the first $800,000 as the sale price would be equal to his cost basis. If the shares had increased in value to $1,000,000, he would only realize a capital gain of $200,000 and an income inclusion of $100,000 after the crystallization, compared to a capital gain of $999,999 and an income inclusion of $499,999.5 if he had not crystallized his exemption and if he no longer qualified for it at the time of sale. Essentially, crystallization locks in the benefit of the capital gains exemption which is then realized when the shares are actually sold. However, the risk of crystallizing the lifetime capital gains exemption is that the individual's exemption will be used and "locked" into those particular shares; so, if the individual is unable to sell those particular shares, he will not have realized the benefits of the LCGE and will no longer be able to use it on any other property either. Book a consultation with one of our experienced Toronto tax lawyers and see if a crystallization is suitable for your specific situation.

Tax Tip – Personalize Tax Planning for LCGE

Tax planning should always be personalized and tailored to an individual's specific circumstances. It is a no brainer to claim the lifetime capital gains exemption if possible, but as seen above, it is not as straightforward or easy to get as one might expect and, while planning can be done to meet some requirements on short notice, others have a 24 month horizon. Canadian small business owners and Canadian owners of farming and fishing properties should always be cognizant of the lifetime capital gains exemption and it is well worth the effort to ensure that you are able to claim it when you sell your QSBC shares or your farming/fishing property. Furthermore, the decision to crystallize the exemption is not always an easy one to make as there are both upsides and downsides to the decision. Our Toronto tax lawyers can help you figure out the best course of action to take and can help you set up a structure to ensure you can claim the lifetime capital gains exemption when you need to.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centres
Competition and Antitrust
Mergers and Acquisitions
Labour and Employment
More Advice Centers
Useful Resources
Forms available to download for income tax filing in Canada.
Hear David J. Rotfleisch discuss timely and highly topical tax matters during appearances and interviews with specialist publications.
Useful explanatory videos of income tax matters.
The following questions and answers are based on the proposed measures that were announced on December 7, 2015.
The official Government website of the CRA.
This guide is for any person who deals with the Canada Revenue Agency (CRA). The guide gives you information on the 16 rights set out in the Taxpayer Bill of Rights and explains what you can do if you believe that the CRA has not respected your rights.
The Office of the Taxpayers' Ombudsman (OTO) works to enhance the Canada Revenue Agency's (CRA) accountability in its service to, and treatment of, taxpayers and benefit recipients through independent and impartial reviews of service-related complaints and systemic issues.
Ontario personal income tax is an annual tax collected from individuals who are Ontario residents on the last day of the tax year or have income earned in Ontario for the tax year.
The following documents provide instructions for filing your 2015 income tax return.
If you earned income in B.C. or operated a Corporation with a permanent establishment in B.C. last year you need to file an income tax return. Find out when you need to file your income tax return, and if any tax credits or rebates apply to you.
Generally, a corporation must file an Alberta corporate income tax return (AT1) for each taxation year during which it has a permanent establishment in Alberta.
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions