How business owners can utilize the lifetime capital gains exemption as it surpasses $1-million in 2024

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The lifetime capital gains exemption (LCGE) for qualified small business corporations is about to hit a milestone. As of 2024, the LCGE amount indexed to inflation will rise to more than $1-million for the first time. Inflation caused the LCGE to soar in the past few years, notably to $971,190 this year from $913,680 in 2022.

Michelle Connolly, senior vice president, advanced tax and estate planning, at Wellington-Altus Private Wealth Inc. in Toronto, notes that 2024 will mark a decade since the LCGE first became indexed to inflation, starting in 2014 with $800,000.

The new 2024 LCGE rate of $1,016,836-million translates into more than $200,000 of sheltered taxable money since 2014 for incorporated small business owners who have sold their business shares.

“There are just three words for how we help business owners – plan, plan and plan,” Ms. Connolly says.

Kevin Burkett, partner at Burkett & Co. Chartered Professional Accountants in Victoria, says the LCGE bump up is something he’s discussing continually with business owners who are in the process of succession planning.

“You have more people coming to a point now at which they’re looking to transition their business,” he says. “They’re selling to their employees or a competitor. This is the most common tool someone will use to make the business transition tax efficient.”

To qualify for the LCGE, the sale needs to be about transferring business shares, not business assets. A majority of the business assets must be used in an active business instead of passive cash or investments. That can be a tough thing for business owners to wrap their heads around, as many businesses accumulate investments within their corporations, Mr. Burkett notes. He uses the example of a car wash business in which a prospective buyer may prefer to simply purchase equipment such as a detailing and vacuum system but the seller would prefer to sell shares tax-free.

With selling shares, there are several conditions to qualify for lifetime capital gains exemption. For example, the owner must have owned the shares for at least 24 previous months.

“You can’t buy a business on a short-term basis and try to flip the business to use the LCGE,” Mr. Burkett says.

And for that 24-month period, more than half of the business’ assets must be used to undertake the business itself.

“You can’t, for example, say you have a car wash business within which you’ve acquired substantial passive investments or art,” he explains.

And Ms. Connolly also notes at the time of sale, that percentage of business assets increases to 90 per cent.

Why presale planning is important

She suggests businesses that aren’t set up in a way to access LCGE spend some time doing so well in advance.

Mr. Burkett calls this “presale planning,” which requires finding a way to remove accumulated excess profits either by transferring out or undertaking a re-organization of the business, so when the time comes, the owners can sell the proceeds tax-free at least on the first $1-milllion and change.

He adds that in the case of a family business in which multiple partners own shares, that increases the LCGE even more. He gives the example of a husband and wife team, who each own 50 per cent of their business in shares. They sell their business for $2-million. In that scenario, the would be able to each access $1-million or more in LCGE in 2024 to help with the tax burden.

“It’s actually something clients ask about when they set up and share ownership of their companies,” he says.

Scott Plaskett, certified financial planner and chief executive officer at Ironshield Financial Planning in Toronto, adds that the LCGE can be multiplied further within a family unit by using a family trust. The shares are owned by the trust.

“All the beneficiaries of the trust would be indirectly selling shares of the operating company,” he says. “Thus, everybody qualifies for the LCGE on a future sale transaction, saving millions in taxation.”

His goal is to ensure all his business owner clients understand the future benefit of LCGE as it continues to increase each year.

“We want to make sure the owner is not putting a lot of retained earnings in the company but putting more into tax-sheltered assets,” he says.

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