The Lifetime Capital Gains Exemption and the 24 Months Nobody Plans For

Founders discover the exemption during due diligence, which is roughly the worst time. The qualification tests look backward, so the work has to have been done already.

The Three Tests, Plainly

• The holding test. The shares must have been owned by you or a related person throughout the twenty-four months before the sale. Shares issued to a new holding company last quarter do not carry history with them automatically.
• The 24-month asset test. Throughout that period, more than half the fair market value of the company's assets must have been used principally in an active business carried on primarily in Canada.
• The 90 percent test at sale. At the moment of sale, substantially all the assets must be active business assets.

What Breaks It

Cash. Specifically, surplus cash and an investment portfolio sitting in the operating company. Those are not active business assets, and a large enough pile fails the tests. This is the single most common reason an otherwise clean sale cannot use the exemption in full.

Multiplying the Exemption

Each individual shareholder has their own exemption. A family trust holding shares, set up well before a sale and administered properly, can allocate a gain among beneficiaries. This is powerful and it is also the area where sloppy implementation gets unwound. It must be real, documented, and established early.

What to Do

1. Have your shareholdings and share history reviewed now, not when a letter of intent arrives.
2. Get a current read on the active-asset percentage of your balance sheet.
3. If surplus cash exceeds what the business needs as working capital, start purifying this year.
4. If you want to multiply the exemption across family members, that structure needs to be in place well ahead of a transaction.

General information for Canadian founders, current to 2026. It is not tax advice and does not account for your specific facts. Rates, thresholds and rules change, confirm the current figures before acting.