Entrepreneurs, you’ve worked hard to build your business. That’s why proper tax planning is essential. It could save you a lot of tax in the event of the sale of your business. One of the key elements in business is “planning”, and good tax planning is no exception!
The principle of the capital gains deduction allows you to obtain a tax reduction when you make a profit from the sale of real estate.
Capital gains deduction (2024 adjustments)
We often hear that entrepreneurs can sell their business without paying capital gains tax. This is partly true, as there is a capital gains deduction (CGD) which, when certain conditions are met, eliminates or reduces the applicable tax on the realized capital gain. The CGD can be used in whole or in part on one or more transactions, and represents a balance available to an individual for life. In 2024, the capital gains deduction limit is $1,016,836 until June 24, 2024, and has been increased to $1,250,000 as of June 25, 2025. This can result in tax savings of up to $333,188 for eligible capital gains realized after June 24, 2024.
In simplified terms, the DGC that can be requested for a given year is the lesser of two amounts:
- The ceiling for available DGC is reduced by the DGC used in previous years;
- The capital gain realized in the year on the disposition of an eligible property.
The capital gains deduction limit is indexed annually. As a result, a person who has already used all or part of his or her CGD in a previous year will again have a CGD balance available in 2024 due to the annual indexing of the limit.
Eligible Assets
Since 1994, the DGC can only be used to offset capital gains realized on eligible shares of a “small business corporation” and on eligible farm or fishing property. To qualify, shares must meet the following criteria, among others:
- Ownership: Shares must be held by an individual, spouse or related partnership for at least 24 months prior to sale. Shares must be shares of a Canadian small business corporation.
- Business activity: The company must operate mainly (50% or more) in Canada.
- Residency: The taxpayer must be a Canadian resident during the year in which the shares are sold, but not necessarily during the 24-month period preceding the sale.
- Small business criteria: At the time of sale, the business must be a small business, using all or substantially all of its assets (90% or more) in an active business carried on in Canada, or in related businesses.
- Continuous ownership: The shares must not have been held by anyone other than the taxpayer or someone related to the taxpayer during the 24-month period prior to the sale.
- Use of assets: During the 24 months preceding the sale of the shares, the company must use its assets primarily (50% or more) in an active business carried on in Canada or in related businesses.
Similar criteria apply to qualified farm or fishing property. Specifically, to qualify, the property must have been used principally in the business of farming or fishing in Canada by the individual, the individual’s spouse, any of their children, or a family farm or fishing corporation for at least 24 months prior to the sale.
The capital gains deduction reduces the amount of taxable income from the sale of active business shares, farm or fishing property. This deduction is designed to encourage investment in small businesses and reward entrepreneurs and investors for their risk. For qualifying farm and fishing property, the deduction limit is particularly advantageous, reaching $1 million, reflecting the importance of the farming and fishing sector to the Canadian economy.
If you’re thinking of selling your business and think it could benefit from the DGC, contact a professional before you begin the process of selling, because as previously mentioned, certain criteria must be met during the 24 months preceding the transaction. Proper tax planning can maximize your tax benefits and ensure that all eligibility criteria are met, whether for the sale of small business shares or farm and fishing property. Keep in mind that tax rules can be complex and that each situation is unique, which is why it’s important to obtain professional advice tailored to your specific situation.
More questions? We have the answer.
What is the small business capital gains deduction?
The capital gains deduction (“CGD”) provides relief on the disposition of qualified small business corporation (“QSBC”) shares. By meeting specific criteria before AND at the time of disposition of your company’s shares, this deduction allows a taxpayer (individual or trust) not to be taxed on up to $913,630 of capital gains (this amount corresponds to the allowable limit for 2022, which is indexed annually). In other words, this deduction allows you to pay no tax on the first capital gain up to $913,630. This ceiling is raised to $1 million for farm and fishing property. Note that this is the “lifetime” limit available per taxpayer, and that certain tax items, such as cumulative net investment losses , may reduce the balance of the available capital gains deduction.
If you run your own business and want to sell it and take advantage of the capital gains deduction, it’s a good idea to consult a tax expert and do some tax planning.
How to qualify shares (AAPE)
For your company’s shares to qualify as a QSBC and for you to benefit from the DGC, general criteria must be met, including:
During the 24 months preceding the sale of the shares :
- The shares must have been owned by the taxpayer or by persons associated with the taxpayer;
- More than 50% of the fair market value of the company’s assets must have been used in the active operation of the business.
When the shares are disposed of :
- At least 90% of the fair market value of the company’s assets must be used for the active operation of the business.
To benefit from this tax advantage, it is essential that your company’s assets be considered eligible for the purposes of these tests, which exclude surplus cash, investments not used in the normal course of business and certain other assets.
Don’t hesitate to contact your professional to discuss possible ways of “purifying” your business to meet the criteria for eligible assets. This is essential if you are to benefit from the DGC.
Ideally, a review of the company’s eligible assets should be carried out annually, with the aim of taking appropriate measures to “purify” the company’s assets where necessary.
How do you calculate capital gains tax?
The capital gain is calculated in three steps:
- Calculate the difference between the sale price (proceeds of disposition) and the purchase price (adjusted cost base or ACB)
- Subtract sales-related expenses (commissions, legal fees, etc.)
- The result is your gross capital gain
What is the maximum capital gains deduction in Canada in 2024-2025?
The maximum capital gains deduction varies by period:
- January 1 to June 24, 2024: $1,016,836
- From June 25, 2024: $1,250,000
Does this deduction apply to all types of capital gains?
No, the maximum deduction applies only to :
- Eligible small business shares
- Eligible farm property
- Eligible fishing goods
Is the deduction renewable each year?
No, this is a lifetime cumulative limit. However, the limit is indexed annually, which can create a new amount available even if you’ve already used your maximum deduction in the past.
