Understanding One of the Most Overlooked Disqualifiers for the Lifetime Capital Gains Exemption
Many Canadian business owners are familiar with the Lifetime Capital Gains Exemption (LCGE)—a powerful tool that can shield up to $1.25 million of capital gains from tax when selling shares of a qualified small business corporation (QSBC). In some cases—such as when selling to an Employee Ownership Trust (EOT)—owners may also benefit from a $10 million exemption under new federal legislation.
But what often goes unnoticed is how easily a business can disqualify itself from the LCGE—simply by holding too much cash.
Why Cash Can Be a Problem
To qualify for the exemption, more than 50% of a company’s assets must be used in active business throughout the 24 months prior to the sale. And at the time of sale, that figure must rise to 90%.
If a business has accumulated excess cash, passive investments, or other non-operating assets, it may fall below these thresholds—even if the core business is healthy and profitable.
And when that happens, owners may lose access to one of the most generous tax benefits available to them.
“I Didn’t Think I’d Ever Sell…”
We have spoken to several business owners who found themselves caught off guard by this rule—especially those who were not originally planning to sell. In some cases, personal circumstances, health, or external offers forced a transition earlier than expected.
Because of the cash or passive assets sitting in the business, they were unable to claim the LCGE and paid significantly more in tax than needed. These were not technicalities—they were major financial consequences.
What You Can Do Now
If you are a business owner—even if you are not planning to sell right now—it is worth asking:
- How much of your company’s assets are “active”?
- Are you carrying excess cash, GICs, or passive investments inside the business?
- Have you reviewed your LCGE eligibility with a qualified tax professional?
Even if you do not intend to transition your business for years, taking a closer look now could save you from difficult (and costly) surprises later on.
Getting Succession-Ready
Planning for a future transition often involves a mix of financial, operational, and tax-related considerations. While we do not offer tax advice, we work alongside business owners and their advisors to help surface the questions that matter early—before they become constraints.
If you are starting to think about succession, even informally, it can be helpful to map out what would need to be in place—so that when the time comes, you are ready to move with clarity and confidence.
Worried Your Business Might Not Qualify for the LCGE?
Excess cash and passive assets could quietly disqualify you from major tax benefits down the line.
Contact us today to start mapping out a transition strategy that keeps your options open—and your business eligible.