How to Qualify for the $1.25M Lifetime Capital Gains Exemption in Canada 

You have dedicated years of hard work and expertise to building your veterinary practice. When you sell, you deserve the full financial reward for your years of effort. One of the most powerful tools available to help you do that is the Lifetime Capital Gains Exemption (LCGE). 

Understanding and planning for the LCGE can significantly reduce your tax bill, potentially saving you hundreds of thousands of dollars. This article will explain what the LCGE is, how your veterinary practice can qualify as a Qualified Small Business Corporation (QSBC), and the strategic steps you need to take long before a sale is on the horizon. 

What Is the Lifetime Capital Gains Exemption? 

In simple terms, the LCGE is a tax deduction that allows Canadian residents to exempt a significant amount of capital gains from tax when they sell shares of a qualified small business corporation. 

As of June 25, 2024, the federal government increased the LCGE to $1.25 million. This means you could potentially earn up to $1.25 million in capital gains from the sale of your practice, tax-free. Based on current tax rates, using the full exemption could save you well over $200,000 in personal taxes.  

Does Your Veterinary Practice Qualify? The Three Key Tests 

To benefit from the LCGE, the shares you sell must be from a Canadian-Controlled Private Corporation (CCPC) that meets the definition of a QSBC at the time of sale. This status depends on meeting three specific tests defined by the Canada Revenue Agency. 

1. The Small Business Corporation Test 

At the time of the sale, at least 90% of your corporation’s assets (by fair market value) must be used in an active business carried on primarily in Canada. For a veterinary practice, “active assets” include items like equipment, inventory, clinic buildings (if owned) and tenant improvements (if leased), as well as the cash needed for daily operations. However, assets like excess cash, or investments such as stocks and real estate, are considered “inactive”. Many professional corporations run into trouble here, as accumulated profits sitting in a bank account or investment properties can disqualify them. 

2. The Holding Period Test 

You, or a person or partnership related to you, must have owned the shares for at least 24 months before the sale. This rule prevents individuals from quickly buying and selling a business just to claim the exemption. This rule highlights the importance of long-term planning. 

3. The Fair Market Value Asset Test 

Throughout the 24 months leading up to the sale, more than 50% of your corporation’s assets must have been used in an active business. This test ensures the business has been genuinely operating as an active enterprise and not just a holding company for passive investments. 

Strategic Planning: Getting Your Practice Ready for the LCGE 

Meeting the three tests does not happen by accident. It requires careful, proactive financial management, ideally starting at least two to three years before you plan to sell. 

“Purifying” Your Corporation 

If your practice has a significant amount of inactive assets (like excess cash), you will need to “purify” the corporation to meet the 90% and 50% asset tests. This involves strategically removing those non-qualifying assets. Common purification strategies include: 

• Paying down business debt 
• Distributing reasonable bonuses or dividends to shareholders 
• Purchasing new equipment or upgrading facilities for the practice 
• Selling or transferring out passive assets 

Multiplying the Exemption with a Family Trust 

In some situations, it is possible to structure ownership through a family trust, allowing multiple family members to each claim their own LCGE on the sale of the shares. However, provincial regulations for veterinary corporations often require all shareholders to be licensed veterinarians, which can limit this strategy. We recommend getting professional advice to determine if this is a viable option for you. 

Crystallizing Your Gains 

Crystallization is a legal reorganization that triggers a capital gain on paper without actually selling the practice. This allows you to “lock in” your use of the LCGE at its current value, protecting your gains from future legislative changes or a decline in your company’s value. 

Important 2024 Tax Changes to Know 

The 2024 Federal Budget proposed to increase the capital gains inclusion rate (the taxable portion of a capital gain) from one-half to two-thirds for gains over $250,000. Although the government has since indicated this change will not proceed, the proposal itself highlights how valuable the LCGE is. If a similar tax hike were to be implemented in the future, the tax-free gains offered by the LCGE would provide an even greater benefit. 

The government also introduced a proposal for the Canadian Entrepreneurs’ Incentive (CEI). While you may hear about this new incentive, it is important to note that it explicitly excludes professional practices, including veterinary services. 

Your Next Step 

The Lifetime Capital Gains Exemption is one of the most valuable tax-saving opportunities for owners of veterinary practices in Canada. However, its rules are complex, and qualifying requires careful, long-term planning. 

Preparing your practice to qualify for the LCGE is a multi-year process. The team at Envision Accounting can help you understand the rules and create a clear financial strategy. Book a complimentary Financial Assessment with us to get started. 

Frequently Asked Questions 

• I have a lot of cash in my practice’s bank account. Will that stop me from using the LCGE? 
  It might. Excess cash not used for daily operations is an “inactive” asset. If it makes up too much of your practice’s value, you may not qualify. You will need a plan to “purify” these assets before a sale. 

• When should I start thinking about the LCGE if I plan to sell in a few years? 
  You should start planning at least 24 to 36 months before your target sale date. The rules require you to meet specific asset tests for two years leading up to the sale, so it is important to prepare well in advance. 

• Is the LCGE something I can figure out on my own? 
  With its complex rules and strict tests, we strongly recommend working with a tax professional. Mistakes can be costly and may lead to disqualification from this valuable exemption. 

• What’s the difference between the LCGE and the new Canadian Entrepreneurs’ Incentive (CEI)? 
  The LCGE is an established exemption of up to $1.25 million for selling a qualified small business. The CEI is a proposed new incentive that, while offering a separate exemption for some entrepreneurs, is not yet law and is not expected to apply to professional practices like veterinary medicine.