LIFETIME CAPITAL GAINS EXEMPTION thru a Professional Corporation

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Contact our law firm for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Professional corporations provide the means to take advantage of the Lifetime Capital Gains Exemption (LCGE), which is one of the most powerful and valuable tax reduction tools available to Canadian professionals. The LCGE allows an individual to exempt a substantial amount of capital gains realized on the disposition of shares of a Qualified Small Business Corporation (QSBC). As of June 25, 2024, this cumulative lifetime limit has been raised to $1.25 million and is indexed for inflation in subsequent years. For professionals like doctors, dentists, lawyers, and accountants who have incorporated their practices, strategic planning to ensure their professional corporation's shares meet the stringent QSBC criteria is paramount to accessing this significant tax shelter upon the sale or intergenerational transfer of their practice.

Accessing the LCGE is not automatic, and for professional corporations, the primary hurdle lies in meeting the two-part "active asset" test required for QSBC status. The first is a historical test, requiring that throughout the 24 months immediately preceding the sale, more than 50% of the fair market value of the corporation’s assets must have been used primarily in an active business carried on mainly in Canada. The second, and often more difficult test, is a point-in-time requirement: at the moment of disposition, all or substantially all (which the CRA defines as 90% or more) of the corporation’s assets must be used in an active business. Professional practices, which tend to accumulate cash and investments, frequently struggle with these thresholds due to the presence of passive assets.

The accumulation of non-active assets, such as excess cash, marketable securities, or passive investments, within the professional corporation can swiftly disqualify the shares from LCGE eligibility. Since many successful professional practices intentionally retain earnings within the corporation to utilize the small business deduction and achieve tax deferral, these passive assets can quickly grow to exceed the 50% historical threshold or, critically, the 90% threshold required at the time of sale. This potential disqualification necessitates careful and timely "purification" planning, often involving removing non-qualifying assets from the operating company well in advance of a sale or retirement to restore the QSBC status.

Ultimately, the ability of a professional to leverage the LCGE depends on proactive tax structuring that begins years before any intended sale. Strategies often involve employing a corporate reorganization, such as setting up a holding company (Holdco) to shelter passive investments, to "purify" the operating professional corporation (Opco) and ensure its assets remain active. Furthermore, tax planning can include implementing an estate freeze or multiplying the available exemption by engaging family members as shareholders.

At Neufeld Legal, we have the experience and insight to assist you in structuring your professional practice as a Professional Corporation. Contact our law firm to incorporate a professional corporation or address legal matters pertaining to your professional corporation at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.