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Capital Gains Tax Planning for Business Owners Canada | Custom CPA
📈 Business Owner Tax Strategy

Capital Gains Tax Planning
for Business Owners in Canada

📌 Quick Summary

For Canadian business owners, a business sale is typically the single largest financial event of their careers — and the capital gains tax consequences of that event can represent hundreds of thousands of dollars in tax savings or losses depending on how well the transaction was planned. The Lifetime Capital Gains Exemption (LCGE) of $1,250,000, Qualifying Small Business Corporation (QSBC) requirements, the 2024 capital gains inclusion rate changes, estate freeze strategies, and the share vs. asset sale decision all interact in ways that require years of advance planning — not last-minute scrambling when a buyer appears. This comprehensive guide covers every major capital gains tax planning strategy available to Canadian business owners.

1. Why Capital Gains Planning Matters for Business Owners

The capital gains tax on the sale of a Canadian business represents the most consequential tax event most business owners will ever face. Yet it is also the most plannable — given sufficient lead time, a CPA can implement strategies that legally reduce or eliminate hundreds of thousands of dollars in capital gains tax. The tragedy is that most business owners only engage with this planning when a buyer appears — by which point many of the most powerful strategies are no longer available because they require 24+ months of advance preparation.

Consider a business owner who sells their company for $2,500,000. Without planning, the capital gains tax at a 50% inclusion rate (Ontario, 2024, pre-inclusion rate change) on a $2.5M gain could be approximately $570,000. With proper planning — LCGE of $1,250,000 sheltering the first $1.25M, and a second shareholder also claiming $1.25M LCGE — the capital gains tax could be reduced to near zero on the same $2.5M gain. The planning window is years, not months.

For home building companies that are planning eventual sales of their businesses, our Home Building Business Plan guide provides the financial planning context. Healthcare professionals selling their practices should review our Healthcare Practice Accounting guide for professional corporation-specific planning. Import/export business owners should see our Import/Export Bookkeeping guide. Consulting firm owners planning exits should review our Tax Services for Consulting Firms guide. And for food manufacturers planning business sales, our Food & Beverage CFO guide covers sector-specific exit planning.

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$1.25M
2024 Lifetime Capital Gains Exemption on qualifying small business shares — per eligible individual
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2/3
New capital gains inclusion rate for corporations and for gains above $250K for individuals — effective June 25, 2024
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24 months
Minimum advance planning window required for QSBC qualification and estate freeze strategies to be effective
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$300K+
Typical tax saving per qualifying shareholder when LCGE is properly planned for on a $1.5M–$3M business sale

📈 Is Your Business Positioned to Qualify for the $1.25M Capital Gains Exemption?

Custom CPA provides capital gains tax planning for Canadian business owners — LCGE qualification review, QSBC analysis, corporate purification, estate freeze strategies, and year-round exit planning.

📞 306-584-9090 ✉️ info@customcpa.ca 📅 Book Free Capital Gains Strategy Call

2. The Lifetime Capital Gains Exemption (LCGE)

The Lifetime Capital Gains Exemption is Canada’s most valuable tax planning tool for business owners — allowing qualifying individuals to shelter up to $1,250,000 of capital gains from income tax entirely. For a business owner in a 50% marginal rate province, the LCGE represents approximately $312,500 in tax savings per qualifying shareholder. The LCGE is not automatic — it must be claimed on the individual’s T1 return in the year of the qualifying disposition, and the shares must meet specific QSBC requirements.

Capital Gains Tax Comparison — $2.5M Business Sale (Ontario, 2024, Pre-June 25 Inclusion Rate)
Tax without planning (solo owner)
~$570,000 tax on $2.5M gain (50% inclusion, 45% personal rate)
~$570,000
Tax with LCGE (solo owner)
~$281,000 tax after $1.25M LCGE shelters first $1.25M
~$281,000
Tax with 2 x LCGE (estate freeze)
~$0 — both shareholders claim $1.25M LCGE on $2.5M gain
~$0
LCGE Category2024 LimitWho QualifiesKey Condition
QSBC shares (small business)$1,250,000Individual Canadian residents who own shares of a qualifying small business corporationShares must meet QSBC test at time of sale (90% active assets) and 24-month rule (50% active assets)
Qualifying farm property$1,250,000Individual owners of qualifying farm real property or shares of a family farm corporationMust be used in a farming business; specific provincial and federal requirements
Qualifying fishing property$1,250,000Individual owners of qualifying fishing vessels, equipment, or shares of a family fishing corporationMust be used in a fishing business; specific requirements under ITA
Real estate gains (residential)No LCGEN/A — capital gains on real estate do not qualify for LCGEPrincipal Residence Exemption (PRE) available only for personal-use primary residence

3. QSBC Qualification — The Critical Prerequisite

The Qualifying Small Business Corporation (QSBC) requirements are the most frequently misunderstood and most commonly failed aspect of LCGE planning. A business that has accumulated passive investments, held excess cash, or had a passive holding structure may fail the QSBC test — disqualifying all of its shareholders from the LCGE. QSBC status must be monitored annually, not just reviewed when a sale is imminent.

📋 QSBC Qualification — The Three Tests
Test 1 — At-time-of-sale test (90% active assets): at the time of the share sale, at least 90% of the fair market value of the corporation’s assets must be attributable to assets used in an active business carried on primarily in Canada. Passive investments, excess cash, and non-operating assets count against this test. Must Pass at Sale
Test 2 — 24-month holding test (50% active assets): throughout the 24-month period immediately before the sale, at least 50% of the FMV of the corporation’s assets must have been used in an active Canadian business. This test looks back — it cannot be fixed at the last minute. 24-Month Lookback
Test 3 — Ownership holding period: throughout the 24-month period before the sale, the shares must not have been owned by anyone other than the individual or a person related to them. Shares recently acquired from unrelated parties may not qualify. Ownership History
The passive asset trap: a profitable business that has been accumulating passive investments (stocks, bonds, GICs, excess cash above operating needs) inside the corporation over several years may fail the 90% active asset test. A business with $1M in active business assets and $150K in passive investments fails at the 87% level. Common Failure Point
Holding company structures: if the business is held through a holding company, the QSBC rules apply to the holding company — but holding companies can qualify if the subsidiary operating company itself qualifies (look-through rules apply in certain structures). Get CPA advice on multi-entity structures well in advance. Holding Co Complexity

4. Capital Gains Inclusion Rate — 2024 Changes

The 2024 federal budget announced a significant change to the capital gains inclusion rate — the percentage of a capital gain that is included in taxable income. This change directly affects business owners planning future sales and was one of the most impactful tax developments for Canadian entrepreneurs in a generation.

Taxpayer TypeBefore June 25, 2024From June 25, 2024Business Owner Impact
Individuals — first $250K of gains/year1/2 (50%) inclusion1/2 (50%) inclusion — unchangedModest business sales; annual crystallization strategies up to $250K still use the lower rate
Individuals — gains above $250K/year1/2 (50%) inclusion2/3 (66.67%) inclusionLarge business sales generate gains well above $250K — the excess is taxed at 2/3 inclusion rate, significantly increasing tax on gains above $1.5M after LCGE
Corporations — all capital gains1/2 (50%) inclusion2/3 (66.67%) inclusion — all gains, no thresholdCorporations selling assets or investments pay higher capital gains tax on all gains from June 25, 2024 — significant for business asset sales vs. share sales
Trusts — all capital gains1/2 (50%) inclusion2/3 (66.67%) inclusion — all gainsFamily trusts with business shares need to reconsider distribution timing strategies; trust-held business shares have higher tax on capital gains above the LCGE
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The Inclusion Rate Change and Business Owners: For a business owner selling a company for $4M with a $3.5M capital gain, and after claiming the $1.25M LCGE (leaving $2.25M in taxable capital gains): under the old rules, $1,125,000 was included in taxable income (50% of $2.25M); under the new rules for individuals, approximately $1,208,000 is included (first $250K at 50%, remaining $2M at 66.67%). The additional tax at a 50% marginal rate is approximately $41,500. For gains through corporations (on asset sales), the higher inclusion rate applies to all corporate capital gains. This makes the LCGE even more valuable under the new rules — sheltering the first $1.25M at zero inclusion is proportionally more beneficial when the remaining gains are taxed at 2/3 inclusion. Our Specialized Services include inclusion rate modelling for business owners planning exits.

5. Share Sale vs. Asset Sale — The Critical Structuring Decision

The decision between selling shares of the business corporation vs. selling the underlying business assets is one of the most consequential structuring decisions in any Canadian business sale. The two parties to the transaction — seller and buyer — typically have directly opposing preferences, and the negotiated structure determines hundreds of thousands of dollars in tax consequences.

ConsiderationShare Sale (Preferred by Seller)Asset Sale (Preferred by Buyer)
Tax treatment of proceedsCapital gain — eligible for LCGE; lower personal tax rate on qualifying sharesProceeds allocated to individual assets; recapture of CCA = business income; goodwill = partial capital gain; often higher overall tax
LCGE availability✓ Yes — QSBC share gain is LCGE-eligible; up to $1.25M sheltered per qualifying shareholder✗ No — no LCGE on asset sale proceeds; all recaptured CCA is fully taxable as income
Buyer’s tax positionBuyer acquires shares at the purchase price; no step-up in tax cost of underlying assets; lower future CCA deductions for buyerBuyer gets a stepped-up ACB on all assets; higher future CCA deductions; more tax benefit for the buyer
Liability transferBuyer takes on all known and unknown corporate liabilities — risk requires thorough due diligence and reps & warranties insuranceBuyer acquires only the specific assets they want; does not inherit corporate liabilities
Price adjustment / bumpIf buyer insists on asset sale, seller typically negotiates a higher price to compensate for the loss of LCGE and higher taxBuyer typically accepts a lower purchase price on asset sale since they get the tax benefit of stepped-up asset costs

📈 Share Sale or Asset Sale — Structure Determines How Much Tax You Pay

Custom CPA models the after-tax proceeds of your business sale under both share and asset sale structures, negotiates the price adjustment for LCGE loss, and ensures the transaction is structured to minimize your lifetime tax bill.

📞 306-584-9090 ✉️ info@customcpa.ca 📅 Book Capital Gains Planning Call

6. Capital Gains Planning Strategies for Canadian Business Owners

Capital gains tax planning is not a one-time pre-sale exercise — it is a multi-year strategy that should be reviewed annually throughout the ownership period. Here are the core strategies available to Canadian business owners:

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LCGE Claim — Claim Your Exemption

Every qualifying shareholder claims their own $1.25M LCGE on the T1 return in the year of the qualifying share sale. No election is required beyond reporting the capital gain — but QSBC qualification must be confirmed before the sale closes.

Highest Value Strategy
❄️
Estate Freeze — Multiply the LCGE

Owner exchanges growth shares for fixed-value preferred shares at current FMV; new growth shares issued to family members or a family trust. Each new shareholder eventually claims their own LCGE — multiplying the total exemption available on the business.

Long-Term Planning
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Purification — Protect QSBC Status

Remove passive assets and excess cash from the corporation before the 24-month QSBC lookback period. Strategies include: declaring dividends, repaying shareholder loans, investing in active business assets, or transferring passive assets to a holding company.

24-Month Lead Time
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Capital Gains Crystallization

Triggering a capital gain on QSBC shares before the sale (by increasing the ACB) to lock in the current LCGE amount and the current inclusion rate. Useful when LCGE limits are expected to increase or when inclusion rates are expected to rise.

Rate Planning
📑
Earnout Structuring

Structuring a portion of the sale price as an earnout (payments based on future performance) can spread capital gains recognition over multiple years — potentially allowing the $250K individual threshold to reset annually and avoiding the higher 2/3 inclusion rate on a single large gain.

Timing Strategy
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Capital Loss Utilization

Capital losses from other investments can be used to offset capital gains from the business sale. ABIL (Allowable Business Investment Loss) rules allow 50% of a loss on qualifying small business shares to be deducted against any income (not just capital gains). Review all investment positions before the sale year.

Tax Offset

7. Estate Freeze — Multiplying the LCGE for Maximum Tax Savings

The estate freeze is one of the most powerful capital gains tax planning strategies available to Canadian business owners — and one that requires the earliest planning lead time. By implementing a freeze, the business owner can potentially multiply the $1.25M LCGE by the number of qualifying family members who hold growth shares, dramatically reducing the total tax on the eventual business sale.

❄️ Estate Freeze — How It Works for a Family Business
Step 1 — Owner exchanges shares for preferred shares — the founder exchanges their common shares for a new class of preferred shares with a fixed redemption value equal to the current FMV of the business (e.g., $1,500,000). No capital gain is triggered at this point (using ITA Section 86 rollover). No Immediate Tax
Step 2 — New common shares issued to family members or a family trust — new growth common shares with a nominal initial value (e.g., $1 each) are issued to the owner’s spouse, adult children, or a discretionary family trust. These shareholders capture all future growth in the business above the frozen value. Future Growth Captured
Step 3 — At exit, multiple shareholders each claim their own LCGE — when the business is sold 5–15 years later for (say) $4,000,000, the gain above the frozen amount ($2,500,000) belongs to the new shareholders. If 2 children each hold 50% of the new shares, each claims $1,250,000 in LCGE — sheltering the entire $2.5M in gain from tax. Maximum Tax Savings
TOSI rules must be respected — the 2018 TOSI rules restrict income splitting from private corporations. However, capital gains from QSBC share sales are generally excluded from TOSI — the LCGE and capital gains from a qualifying business sale remain available to family members who hold shares, even under TOSI. Confirm the structure with your CPA annually. TOSI Review Required

8. Corporate Purification — Protecting QSBC Status

Corporate purification is the process of removing passive assets from a corporation before the 24-month QSBC lookback period to ensure the corporation passes the 90% active asset test at the time of sale. This is the most commonly required pre-sale planning step for profitable businesses that have been accumulating passive investments or excess cash inside their corporations.

Passive Asset TypePurification StrategyTax Implications of PurificationLead Time Required
Excess cash above operating needsDeclare dividends to remove cash; repay shareholder loans; reinvest in active business assets; transfer to holding companyDividend triggers personal tax; loan repayment is tax-free if on pre-existing shareholder loanCan be done relatively quickly; but must be done 24+ months before sale for 24-month test
Portfolio investments (stocks, bonds)Transfer to a holding company via reorganization before the 24-month period; or distribute to shareholders as dividends in kindTransfer to holdco at FMV may trigger capital gains; dividend in kind triggers personal tax — model costs vs. benefit24+ months before sale; reorganization may require additional planning time
Real estate held in the corporationTransfer real estate to a separate holding company or sell to a related party; or retain and manage the 90% test through active asset growthTransfer triggers capital gains and potential recapture; must model the net benefit vs. LCGE protection24+ months minimum; property transfer has its own GST/HST and land transfer implications
Shares in related companiesShares in other active businesses may actually count as active assets (if the investee qualifies); passive investments in unrelated public companies do not count and must be removedDepends on the nature of the investee; get CPA opinion on each investment’s classificationClassify all investments with CPA at least 24 months before planned exit

9. Year-Round Capital Gains Planning Checklist

Capital gains tax planning for business owners is a year-round discipline — not a pre-sale scramble. The following checklist should be reviewed annually with a CPA. Our Core Accounting & Tax Services and Strategic CFO Advisory Services include annual QSBC monitoring and capital gains exit planning as standard engagements for business owner clients.

📅 Annual Capital Gains Planning Checklist for Business Owners
Annual QSBC qualification review — calculate the 90% active asset test as of year-end. If passive assets exceed 10% of FMV, begin purification planning immediately. Don’t wait until the year of a potential sale. Annual Priority
Monitor passive income and SBD grind — passive income above $50,000 inside the corporation also grinds down the Small Business Deduction limit. The same excess cash that creates QSBC risk also reduces the SBD benefit. Addressing excess passive assets serves a double purpose. Dual Purpose
Review LCGE utilization to date — the LCGE is cumulative and lifetime-limited. Review how much of the $1.25M has already been used in prior years on previous qualifying dispositions. Remaining LCGE room is what’s available for the current business. LCGE Tracking
Consider an estate freeze if the business is growing rapidly — the earlier an estate freeze is implemented, the more future growth is allocated to family members’ shares and the larger the eventual LCGE multiplication benefit. A business growing at $500,000/year in value represents $250,000/year of future LCGE opportunity passing to the next generation by waiting a year. Time-Sensitive
Model the after-tax exit value — at least every 3 years, prepare a full capital gains tax model showing the net after-tax proceeds from a hypothetical business sale at current FMV under both share and asset sale structures. This is the most important number a business owner should know. Exit Intelligence
Review the impact of the 2024 inclusion rate change — for planned exits, model the difference between the 50% and 66.67% inclusion rate on gains above the $250K threshold and above the LCGE. For corporate-held assets, note the higher rate applies to all gains with no threshold. 2024 Change Impact
Capital gains crystallization if rates may increase — if further inclusion rate increases are anticipated, or if the LCGE limit is expected to rise and the business could be sold above the current limit, crystallization allows locking in the current rates and current LCGE limit. Rate Protection
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The 24-Month Rule Makes Early Planning Non-Negotiable: The most important insight in capital gains planning for business owners is that many of the most valuable strategies — estate freezes, purification, and family member share issuances — require 24 months to take effect for QSBC qualification purposes. A business owner who engages in capital gains planning only when a buyer appears has already forfeited many of these opportunities. The value of ongoing annual CPA engagement specifically for capital gains monitoring is measured in the hundreds of thousands of dollars of tax savings it preserves. Our Business Planning & Financial Modeling services include multi-year capital gains exit models for business owner clients.

✓ Custom CPA — Capital Gains Tax Planning That Protects Your Business Exit

QSBC qualification review, corporate purification strategy, estate freeze implementation, share vs. asset sale modelling, LCGE planning, and year-round capital gains monitoring — the complete exit tax planning service for Canadian business owners.

📞 306-584-9090 ✉️ info@customcpa.ca 📅 Book Free Capital Gains Consultation

10. Frequently Asked Questions

What is the Lifetime Capital Gains Exemption (LCGE) in Canada?▼
The Lifetime Capital Gains Exemption (LCGE) is one of Canada’s most valuable tax benefits for business owners — allowing qualifying individuals to shelter a cumulative lifetime amount of capital gains from income tax entirely. 2024 LCGE amount: for qualifying small business corporation (QSBC) shares, the 2024 LCGE limit is $1,250,000. This means an individual who sells QSBC shares with $1,250,000 in capital gains pays zero capital gains tax on that amount. The exemption has been indexed for inflation since 2014 and has been increasing significantly in recent years. How the tax saving works: without the LCGE, a $1,250,000 capital gain at a 50% inclusion rate would add $625,000 to taxable income. At a 50% personal marginal rate, the tax on that would be approximately $312,500. With the LCGE, that entire $312,500 is saved. Multiple shareholders — LCGE multiplication: each individual who holds qualifying shares can claim their own LCGE. If a business owner and their spouse each hold qualifying shares, they can each claim the full $1,250,000 LCGE — sheltering up to $2,500,000 in total capital gains from tax. This is the primary reason why estate freezes and family share issuances are such powerful capital gains planning tools. The LCGE is not automatic: the shareholder must claim the LCGE on their T1 return in the year of the qualifying disposition, and the shares must meet all QSBC requirements at the time of sale. The LCGE is a cumulative lifetime limit — any portion used on previous qualifying transactions reduces the remaining amount available. Also available for farm and fishing property: the $1,250,000 LCGE also applies to qualifying farm property (farm land, farm corporation shares) and qualifying fishing property — the same limit applies across all qualifying property types combined.
What is a Qualifying Small Business Corporation (QSBC)?▼
A Qualifying Small Business Corporation (QSBC) is a Canadian-Controlled Private Corporation (CCPC) that meets all three of the following conditions for the shares to be eligible for the LCGE on sale: Test 1 — At the time of sale (90% active asset test): at the time the shares are sold, at least 90% of the fair market value of the corporation’s assets must be attributable to assets used primarily in an active business carried on in Canada, or shares or debt of another QSBC connected to the corporation. What counts as active business assets: machinery, equipment, real property used in the active business, accounts receivable from the business, goodwill, and intellectual property used in the business. What does NOT count: portfolio investments, excess cash held passively, rental properties not used in the active business, and bonds or GICs. Test 2 — Throughout the 24 months before sale (50% active asset test): for the entire 24-month period immediately preceding the sale, at least 50% of the fair market value of the corporation’s assets must have been used in an active Canadian business. This is a backward-looking test — it cannot be fixed at the last minute. A corporation that has been accumulating passive assets for years may fail this test even if passive assets are removed right before the sale. Test 3 — The 24-month ownership period: the shares must not have been owned by anyone other than the individual or a person or partnership related to the individual throughout the 24 months before the sale. If shares were recently acquired from an arm’s-length party, they may not qualify. Why this matters in practice: the most common way businesses fail QSBC qualification is by accumulating passive investments (stocks, bonds, GICs) or excess cash inside the corporation. A business with $2M in active business assets and $300K in passive investments fails the 90% test (87.0% active). The CPA’s annual QSBC review catches this and allows purification before the 24-month lookback window begins.
What is the capital gains inclusion rate in Canada for 2024 and beyond?▼
The capital gains inclusion rate is the percentage of a capital gain that is included in the taxpayer’s taxable income. Canada’s inclusion rate has changed several times over the years, and the 2024 federal budget announced a significant increase effective June 25, 2024. For individuals — two-tier system: the first $250,000 of capital gains realized by an individual in a calendar year continues to be included at 1/2 (50%); capital gains above $250,000 in a year are included at 2/3 (66.67%). This threshold applies annually — it is not a lifetime threshold. For corporations — flat higher rate: corporations pay the 2/3 (66.67%) inclusion rate on ALL capital gains from June 25, 2024 onward — there is no $250,000 threshold for corporations. This significantly increases the tax on corporate-held capital gains, making the structure of business sales (share vs. asset sale) even more important. For trusts: the 2/3 inclusion rate applies to all capital gains in trusts, similar to corporations. Practical implications for business owners: for a large business sale generating a $3M capital gain after the LCGE on an individual T1, the tax under the old rules would have been calculated on $1,375,000 (50% of $2.75M above LCGE). Under the new rules, it is approximately $1,541,667 (50% of first $250K plus 66.67% of remaining $2.5M). The additional taxable income is approximately $166,667 — representing an additional $83,000 in personal tax at a 50% marginal rate. Why LCGE is even more valuable under the new rules: the LCGE shelters the first $1.25M at zero inclusion. Under the new rules, the gains above the LCGE that were previously taxed at 50% inclusion are now taxed at 66.67% inclusion — making the sheltered portion even more valuable by comparison. Legislative status: as of the date of this guide, confirm the current legislative status of the inclusion rate changes with your CPA, as the proposals were subject to legislative process.
Should a Canadian business owner sell shares or assets?▼
The share sale vs. asset sale decision is one of the most consequential in any Canadian business transaction. The parties typically have opposing interests — sellers generally prefer share sales, buyers generally prefer asset sales. Why sellers prefer share sales: all sale proceeds are a capital gain on the shares — eligible for the LCGE on qualifying QSBC shares (up to $1.25M per shareholder sheltered from tax); the gain is subject to the capital gains inclusion rate (50% or 66.67%), not fully included in income; the seller walks away from all corporate liabilities. Why buyers prefer asset sales: the buyer gets a stepped-up adjusted cost base (ACB) on all purchased assets — meaning they can depreciate (take CCA on) the full purchase price allocation to depreciable assets going forward; the buyer avoids inheriting unknown corporate liabilities (litigation, environmental, tax contingencies); the buyer can cherry-pick which assets to acquire and which to leave behind. The price adjustment mechanism: in practice, when a buyer insists on an asset sale, the seller negotiates a higher total price to compensate for the increased tax burden. The price adjustment is typically calculated as: the estimated additional tax cost to the seller from the loss of LCGE and higher income treatment of recaptured CCA. This can add 10–20% to the required purchase price, making an asset sale more expensive for the buyer. Hybrid structures: some transactions combine elements of both — for example, a sale of shares with a separate asset-sale treatment for specific assets the buyer requires clean title to (like real estate). These hybrid structures require careful planning by both parties’ CPAs and lawyers. The critical takeaway: if a buyer is proposing an asset sale for a business where the seller qualifies for the LCGE on a share sale, the seller’s CPA must model the exact tax differential and the minimum price adjustment that makes the seller financially indifferent between the two structures. Never accept an asset sale proposal without this analysis.
What is an estate freeze and how does it help with capital gains planning?▼
An estate freeze is a tax planning strategy that allows a business owner to freeze (fix) the current value of their ownership interest in the corporation, while shifting all future growth in value to new shares held by family members or a family trust. The primary capital gains benefit is the multiplication of LCGE claims across multiple family shareholders. How it works mechanically: the business owner uses ITA Section 86 or Section 51 to exchange their existing common (growth) shares for a new class of preferred (fixed-value) shares. The preferred shares are structured with a redemption value equal to the current fair market value of the business — this is the “frozen” amount. The owner’s capital gain is fixed at zero on these preferred shares (they have no future appreciation potential). New common shares are then issued at a nominal price (e.g., $1 per share) to family members — adult children, a spouse, or a discretionary family trust. These new shares capture all future appreciation above the frozen amount. LCGE multiplication example: owner freezes at $1.5M; business later sells for $4.5M; growth of $3M is allocated to children’s new common shares. With two adult children each holding 50% of the new shares: each has a $1.5M capital gain, each claims $1.25M LCGE, total LCGE of $2.5M shelters most of the $3M in growth. TOSI and estate freezes: the Tax on Split Income (TOSI) rules introduced in 2018 significantly restrict dividend splitting through private corporations. However, capital gains from a qualifying QSBC share sale — including gains on estate freeze shares — are generally excluded from TOSI. Family members who hold new shares from an estate freeze can claim the LCGE on their capital gains when the shares are eventually sold, without TOSI applying. However, TOSI review is required annually to confirm the structure remains appropriate. Lead time required: for the new shares to qualify for QSBC treatment and LCGE eligibility, the family members must hold the shares for at least 24 months before the sale, the shares must meet the QSBC asset tests, and the ownership holding period requirements must be satisfied. An estate freeze implemented 2–3 years before an anticipated sale provides the maximum benefit; a freeze implemented 6 months before a sale may not provide sufficient time for full QSBC qualification of the new shares.
Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.

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