The lifetime capital gains exemption (LCGE) shelters $625,000 of TAXABLE capital gain — the taxable half of a $1,250,000 gross gain — on a disposition of qualified small business corporation shares or qualified farm or fishing property, under section 110.6 of the Income Tax Act, and that figure indexes to inflation for taxation years beginning after 2025.
The $625,000 in section 110.6(2)(a) is a deduction against taxable capital gain — and section 38(a) fixes the taxable fraction at one-half of the capital gain, so the statutory number corresponds to a $1,250,000 gross gain. Section 117.1 then indexes the $625,000 to the Consumer Price Index for taxation years starting after 2025, which is why a current-year figure should always be confirmed rather than assumed.
The exemption shapes seller price expectations in almost every private Canadian deal, which makes the ways it is lost a fund’s problem too: late or grossly negligent filing forfeits it under section 110.6(6); a dividend strip aimed at reducing the gain can forfeit it under (7); and a cumulative net investment loss quietly grinds it down for owner-managers who have carried investment losses since 1988. A seller pushing for corporate purification or a rushed close is often working around one of these traps — worth asking about directly rather than discovering in an indemnity claim. One Ontario firm’s own guidance to individual sellers is consistent with the indexing point: “you should confirm the current ceiling with a tax advisor rather than relying on any specific number.”
A founder sells QSBC shares for $2,000,000 against a $100,000 adjusted cost base — a $1,900,000 gross gain. At the one-half inclusion rate, the taxable gain is $950,000. The $625,000 exemption shelters most, but not all, of it: $325,000 of taxable gain remains, taxed at the founder’s marginal rate. Sellers who quote “the exemption covers my whole gain” on a deal this size are almost always thinking in gross-gain terms, not taxable-gain terms.
See also: Crystallisation · Corporate purification · Alternative minimum tax.
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