Summary: The lifetime capital gains exemption can shelter up to $1,275,000 of gain per person in 2026, but whether it applies is decided long before the sale. Selling shares rather than assets, owning them personally or through a family trust, and passing the qualifying tests over the prior 24 months matter far more than the tax return.
The short answer
The lifetime capital gains exemption lets an individual who sells shares of a qualifying Canadian-controlled private corporation pay no regular income tax on up to $1,275,000 of the gain in 2026. At British Columbia's top combined rate on capital gains of 26.75%, a full exemption is worth roughly $341,000 to each person who can claim it, and where a spouse, adult children or a family trust also hold shares, that amount can be claimed more than once.
The exemption is federal, and BC has no separate version of its own, but because BC calculates its tax on the same taxable income, the deduction reduces your provincial tax as well. Whether it applies to your sale is rarely settled on your tax return. It is settled by three things that are fixed well before closing: whether you sell shares rather than the company selling its assets, whether the shares are owned by you or a family trust rather than by a holding company, and whether the company passes the qualified small business corporation tests on the day of the sale and throughout the 24 months before it.
The exemption is not claimed at the sale. It is earned in the years before it.
Why qualifying is decided long before the sale
Most founders first hear about the exemption as a number, usually from a peer who sold a few years earlier, and it is easy to assume the number simply arrives with the sale. In practice the exemption behaves more like an exam with a long qualifying period, and the questions are set by the way the company and its ownership were organized years before any buyer appeared.
The problems tend to surface at the worst possible moment. A letter of intent is signed, the accountant starts the tax model, and only then does it emerge that the shares sit in a holding company, or that three years of retained earnings are parked in the operating company as cash and investments, or that the buyer has priced the deal as an asset purchase. Each of these can reduce the exemption to nothing, and none of them can be fixed on the buyer's timetable, because the qualifying period looks back two full years.
| What decides the exemption | When it is effectively fixed | What can remove it |
|---|---|---|
| Share sale or asset sale | In the letter of intent | An asset sale by the company gives the owners no exemption |
| Who owns the shares | When the ownership structure was set up | Shares owned by a holding company cannot use it on a direct sale |
| More than 50% active assets | Throughout the 24 months before the sale | Surplus cash and investments building up in the company |
| Substantially all (90%) active assets | On the day of the sale | Passive assets not removed before closing |
| Who held the shares | Throughout the 24 months before the sale | Shares owned by someone outside the family during that period |
| How many people can claim | When a freeze or family trust was put in place | No structure in place well before the sale |
A founder who sees this table two years before a sale has options in every row. A founder who sees it after the letter of intent usually has options in one or two.
How much is the lifetime capital gains exemption in 2026?
For dispositions in 2026, the exemption on qualified small business corporation shares is $1,275,000 of capital gain per individual. Because only half of a capital gain is taxable, the deduction you actually claim on your return is $637,500, which is the taxable half of that gain. The same limit applies to qualified farm and fishing property, and it is a lifetime limit, so any amount you have claimed in earlier years, including on a past crystallization, reduces what is left.
In BC, the value of that deduction is straightforward to estimate. The top combined federal and provincial rate on ordinary income is 53.5% for 2026, which makes the top rate on capital gains 26.75%, so sheltering $1,275,000 of gain saves a top-bracket seller roughly $341,000 in regular tax. A gain above the exemption is taxed in the normal way, with half included in income.
Why do different sources give different numbers?
If you have asked an AI assistant, searched online or compared notes with other founders and come away with conflicting figures, the confusion is understandable, because the rules changed several times in under two years and some of the changes were proposed, deferred and then dropped. Much of what is still published describes a proposal rather than the law.
| Change | What was proposed | Where it stands in 2026 |
|---|---|---|
| Exemption limit | Raised from $1,016,836 to $1,250,000 for dispositions on or after June 25, 2024 (Budget 2024) | Enacted: Bill C-15 received Royal Assent on March 26, 2026 |
| Indexing | Paused at $1,250,000, to resume in 2026 | Resumed: $1,275,000 for 2026 |
| Capital gains inclusion rate | Increase from one half to two thirds on gains above $250,000, first for June 25, 2024 and then deferred to January 1, 2026 | Cancelled on March 21, 2025; the rate remains one half |
| Canadian Entrepreneurs' Incentive | A reduced inclusion rate on a further block of qualifying gains (Budget 2024) | Not carried forward in Budget 2025 |
| Alternative minimum tax | 30% of exempt gains included in the AMT base, at a 20.5% federal rate | Enacted in 2024 and in force |
The practical reading is simple. In 2026 the exemption is $1,275,000, the inclusion rate is one half, and the incentive that would have sheltered gains above the exemption does not exist. Anything that describes a two-thirds inclusion rate or a separate entrepreneurs' incentive is describing a proposal that did not become law.
The higher exemption only became law in March 2026, which is a useful reminder that a figure announced in a budget is not yet a figure you can plan a sale around.
Who can claim the lifetime capital gains exemption?
Only individuals can claim it, generally only while resident in Canada, and only on a gain from selling qualifying shares. That sounds like a technicality, but it decides more sales than any other rule, because many founders own their company in a way that quietly takes them outside it.
The company must sell shares, not assets. If the buyer purchases the operating company's assets, the gain belongs to the corporation, and corporations cannot claim the exemption. Buyers often prefer an asset purchase because it gives them a higher tax cost to depreciate and leaves the company's history behind, so the choice between a share sale and an asset sale is a negotiation in which the exemption has a real dollar value. A seller who knows that the exemption is worth roughly $341,000 per eligible shareholder can price the difference, rather than conceding it.
The shares must be sold by you, not your holding company. Many founders hold their operating company through a holding company, often for creditor protection or to move surplus cash out of the business tax-efficiently. If the holding company sells the operating company's shares, the gain is the holding company's and no exemption is available on it. There are ways to plan around this, such as having the holding company receive tax-free dividends of the operating company's safe income before the sale to reduce the gain, or selling the shares of the holding company itself where it qualifies, but they need to be considered long before a buyer is chosen. Buyers rarely want to purchase a holding company with its own history.
The gain has to be on qualified small business corporation shares. The shares are tested against three conditions, described below, and failing any of them removes the exemption entirely rather than reducing it.
What are the qualified small business corporation share tests?
Shares qualify only if all three of the following are met, and two of them look back over the 24 months before the sale.
The 90% test on the day of sale. At the time of the sale, the company must be a Canadian-controlled private corporation, and all or substantially all of the fair market value of its assets, generally read as at least 90%, must be used principally in an active business carried on primarily in Canada, or be shares or debt of connected companies that meet the same tests. Surplus cash, a portfolio of investments, a rental property or a large loan to a shareholder all count against this percentage.
The 50% test over the previous 24 months. Throughout the 24 months before the sale, more than 50% of the company's assets must have been used in an active business in the same way. This is the test that cannot be repaired quickly. If excess cash has been building in the company for years and the 50% threshold has been breached, removing the cash shortly before the sale satisfies the 90% test but does not reset the clock, so the shares may not qualify until the company has met the test for a further 24 months.
The 24-month holding period. Throughout the 24 months before the sale, the shares must not have been owned by anyone other than you or a person related to you. Shares issued from the company's treasury during that period are generally treated as failing this test unless they were issued in specific circumstances, which is why an investor round or a new share class shortly before a sale needs careful attention.
Where the operating company sits under a holding company, the tests are applied across the group, with additional rules for connected companies that require each level to meet its own thresholds. A group in which the holding company has accumulated investments of its own can fail the tests even when the operating business is entirely active.
Removing passive assets is called purification. It typically involves paying surplus cash out to a holding company, moving investments or real estate to a separate company, or repaying shareholder loans, and every method has its own tax cost. Purification done three years before a sale is routine. Purification done in the month before closing may satisfy the 90% test while the 50% test has already been failed.
A company does not have to be small to pass these tests. It has to be focused.
Can my spouse and children each claim the exemption?
They can, provided each of them owns qualifying shares, or receives a share of the gain through a family trust, in a way that was in place well before the sale. Each eligible individual has their own $1,275,000 limit, so a family of four with a properly structured trust could potentially shelter up to $5.1 million of gain in 2026, which at BC's top rate is worth up to roughly $1.36 million in regular tax.
An estate freeze is usually how it starts. The founder exchanges their growth shares for fixed-value preferred shares, and new common shares are issued to family members directly or, more often, to a discretionary family trust. All growth after the freeze accrues to the new shares, and because those shares must satisfy the 24-month holding test and the asset tests like any others, the freeze has to happen years before the sale to deliver its full value. A freeze put in place the year before a sale captures very little growth and may not meet the holding period at all.
The trust allocates and designates the gain. When a family trust sells qualifying shares, it can allocate the gain to individual beneficiaries and designate it so that each beneficiary claims their own exemption. The gain must be paid or made payable to the beneficiary within the trust's taxation year, which ends December 31, so a sale late in the year leaves little time to complete the paperwork, and the trust deed has to permit the distribution in the first place.
Beneficiaries under 18 need separate planning. Adult family members can generally claim the exemption on gains from qualifying shares sold to an arm's-length buyer without falling under the tax on split income, while special rules apply to minors, so the allocation to younger beneficiaries should be confirmed with your accountant before the sale rather than after it.
The money then belongs to the beneficiary. An exemption claimed by an adult child means the after-tax proceeds are legally that child's, which is a family and estate question as much as a tax one, and it is worth deciding deliberately rather than discovering after the sale.
Multiplying the exemption is rarely the hard part technically. The hard part is having started early enough.
What can reduce the exemption you are able to claim?
Even when the shares qualify, several rules can shrink the amount you can use in the year of the sale or add a cost that the headline figure hides.
Alternative minimum tax. Since 2024, 30% of a capital gain sheltered by the exemption is included in the alternative minimum tax base, along with 100% of other capital gains, and AMT is calculated at a federal rate of 20.5% above an exemption tied to the start of the second-highest federal tax bracket. A founder whose income in the sale year is mostly an exempt gain can therefore owe AMT even when their regular tax is small. Any AMT paid can be carried forward and recovered against regular tax over the following seven years, so for many families it is a timing cost rather than a permanent one, but it is a real cash cost in the year of sale and belongs in the tax reserve.
Cumulative net investment loss. If you have deducted more investment expenses over the years, such as interest on investment loans or rental losses, than you have earned in investment income, the excess reduces the exemption available to you until it is offset. Founders who borrowed to invest or carried rental losses can be surprised by this.
Allowable business investment losses. A loss claimed on shares or debt of a small business corporation, for example on an earlier venture that failed, reduces the exemption you can claim.
Earlier claims and crystallizations. The limit is lifetime, so any exemption used in the past, including a crystallization done years ago to lock in the exemption at the time, reduces what remains, although the increase to $1,250,000 and the 2026 indexing add new room above the earlier limit.
The exemption on paper and the exemption in your pocket are not always the same number, which is why the after-tax model should be built before the letter of intent rather than at tax time.
What mistakes cost founders the exemption?
The expensive mistakes are almost never on the tax return. They are structural, and they are made, or left unmade, years earlier.
Letting cash build up in the operating company. Profitable founders often leave years of retained earnings in the business, which is sensible until a buyer appears and the 50% test turns out to have been failed for the past two years.
Holding the operating company through a holding company without a sale plan. The structure that protects retained earnings can remove the exemption on a direct sale, unless the planning to deal with it was done in advance.
Agreeing to an asset sale without pricing the exemption. Once the letter of intent says assets, the exemption is usually gone, and the price should reflect that.
Freezing too late. A freeze and family trust put in place in the year of a sale capture little growth and may not satisfy the holding period, so the cost of the structure can exceed its benefit.
Issuing new shares shortly before a sale. A new investor or a new share class within the 24-month window can cause shares to fail the holding period test.
The common thread is timing. Every one of these is easy to address three years out and difficult or impossible three months out.
What changes the picture?
Several situations change how the exemption works, when it can be claimed or whether it is worth what it appears to be.
Part of the price is paid later. Where some of the proceeds are deferred through a vendor take-back note or holdback, the capital gains reserve can spread the gain over as many as five years, and the exemption can generally be claimed as each portion of the gain is brought into income, provided the shares qualified when they were sold. Spreading the gain can also reduce the AMT in any one year. An earnout follows its own rules, and how the earnout is drafted affects when the gain is recognized and how it is taxed, so it should be reviewed by your accountant before the purchase agreement is signed.
The sale closes late in the year. A family trust has until December 31 to pay or make payable the gains it allocates to beneficiaries, and a November or December closing compresses the time to complete allocations, designations and any year-end planning around AMT and charitable giving.
You are a US citizen or US resident. The Internal Revenue Service does not recognize the Canadian exemption, so a gain sheltered in Canada can still be taxable in the US, and foreign tax credits will not offset Canadian tax that was never paid. A US connection in the family should be raised with cross-border advisors before the sale is structured.
You plan to leave Canada. The exemption is generally available only to Canadian residents, and leaving Canada triggers a deemed disposition of most property at fair market value, so the order of a move and a sale matters.
You want to lock in the exemption before a sale is on the horizon. Some owners crystallize the exemption by triggering a gain on their shares while the company qualifies, raising the tax cost of the shares without selling them to a third party. It can protect the exemption against future changes in the business, but it uses up exemption room, can trigger AMT and has to be done carefully to avoid the anti-avoidance rules on transfers to related corporations.
What if I have already sold my business?
Some doors close at signing. If the company sold its assets, if your holding company sold the shares, or if the shares failed the asset or holding tests, the exemption is not available on that sale, and it is better to accept that clearly than to look for a structure that no longer fits. The focus then moves to the tools that remain, such as the capital dividend account in a holding company, the capital gains reserve on deferred proceeds and the year-end planning around the gain.
If the shares did qualify, the work in the months after closing is confirming the claim rather than creating it:
- Reconcile the gain to the final closing statement, including working capital adjustments and escrow.
- Confirm each family member's or trust beneficiary's claim, and that the trust's allocations and designations were completed within its taxation year.
- Check for cumulative net investment loss, earlier claims and business investment losses that reduce the amount available.
- Model the alternative minimum tax and set aside the cash for it, along with any instalments.
- Decide whether to claim a capital gains reserve on deferred proceeds.
The exemption is claimed on your personal tax return for the year of the sale, but the evidence that the shares qualified, the asset values over 24 months and the share register, should be kept with the closing documents in case the claim is reviewed.
Where Westmount starts
Westmount Wealth Management is a Canadian portfolio manager with offices in Vancouver, Qualicum Beach and Toronto. It is registered in BC, Alberta, and Ontario and provides discretionary portfolio management to founders during and after a business sale, as well as to incorporated and asset-rich retirees.
The most valuable work on the exemption happens two or three years before a sale, alongside your accountant and lawyer, when the ownership structure, the company's balance sheet and the family's plans can still be shaped together, and the investment plan for the proceeds can be built on an accurate after-tax number. If you are thinking about a sale, or have recently completed one, the first conversation is a discovery meeting to understand where your structure stands today and what still needs deciding.
Frequently asked questions
What is the lifetime capital gains exemption for 2026?
For 2026, the exemption on qualified small business corporation shares is $1,275,000 of capital gain per individual, which is a deduction of $637,500 because only half of a capital gain is taxable. It is a lifetime limit, reduced by any exemption claimed in earlier years, and it is now indexed to inflation each year.
Does British Columbia have its own capital gains exemption?
No. The exemption is federal, but BC calculates its tax on the same taxable income, so the deduction reduces your provincial tax as well. At BC's 2026 top combined rate on capital gains of 26.75%, a full exemption is worth roughly $341,000 to a top-bracket seller.
Can I claim the exemption if my holding company sells my company's shares?
No. Only individuals can claim the exemption, so a gain realized by a holding company is not eligible. Founders who hold their operating company through a holding company usually need to plan for this well before a sale, for example through safe income dividends that reduce the holding company's gain or by restructuring ownership so that individuals or a family trust hold qualifying shares.
Is the capital gains inclusion rate going up to two thirds?
No. The increase was proposed in 2024, deferred to January 1, 2026, and cancelled on March 21, 2025, so the inclusion rate remains one half. The increase in the exemption to $1,250,000 was kept and became law when Bill C-15 received Royal Assent on March 26, 2026.
Will I pay alternative minimum tax if I claim the exemption?
Possibly. Since 2024, 30% of a gain sheltered by the exemption is included in the AMT base and taxed at a federal rate of 20.5% above the AMT exemption, so a founder whose income in the sale year is mostly an exempt gain can owe AMT even when regular tax is small. Any AMT paid can be recovered against regular tax over the following seven years, which makes it a timing cost for many families, but it should be modelled before closing.
How long before a sale should I start planning for the exemption?
Ideally two to three years. The shares must pass a 50% active asset test and a holding period test throughout the 24 months before the sale, and an estate freeze or family trust needs time to capture growth and meet the same tests before it can multiply the exemption across a family. Planning that starts at the letter of intent can still confirm and protect a claim, but it can rarely create one.
References
- Canada Revenue Agency, Indexation adjustment for personal income tax and benefit amounts (2026 exemption limit of $1,275,000 and deduction limit of $637,500; 2026 federal top bracket).
- Government of British Columbia, Personal income tax rates (2026 BC top rate of 20.50% above $265,545).
- Prime Minister of Canada, Prime Minister Mark Carney cancels proposed capital gains tax increase, March 21, 2025 (inclusion rate increase cancelled; exemption increase to $1,250,000 maintained).
- EY, Tax Alert 2026 No. 22 (Bill C-15 Royal Assent on March 26, 2026, enacting the exemption increase for dispositions on or after June 25, 2024).
- Mondaq, Update on the capital gains exemption and qualified small business corporation shares, March 2026 (qualified small business corporation share tests; deferral and cancellation of the inclusion rate increase).
- Carleton University, Capital gains deduction: 2026 note (connected corporation tests; effect of cumulative net investment loss and allowable business investment losses).
- PwC Canada, Changes to the alternative minimum tax enacted in 2024 (20.5% rate, 30% inclusion of exempt gains, seven-year carryforward).
- Doane Grant Thornton, What's the Canadian Entrepreneurs' Incentive? (incentive not carried forward in Budget 2025).
This information has been prepared by Westmount Wealth Management Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc.
This material is distributed for informational purposes only and is not intended to provide personalized legal, accounting, tax, or specific investment advice. Please speak to a Westmount Wealth Advisor regarding your unique situation.
