Purification Planning: Ensuring Clients Qualify for the LCGE
How CPAs Can Help Clients Unlock One of Canada’s Most Valuable Tax Opportunities
The Lifetime Capital Gains Exemption (LCGE) is one of the most powerful tax planning tools available to Canadian entrepreneurs. It allows individuals to shelter up to $1.25 million, up from the previous $1,016,836 in capital gains on the sale of qualified small business corporation (QSBC) shares. However, this benefit is not automatic—qualifying requires thoughtful and proactive planning, especially in the realm of "purification."
For CPA firms, this presents a critical opportunity to deliver integrated advisory value to business owner clients and their families.
Why Purification Matters in a Business Exit
To qualify for the LCGE, the shares sold must meet strict tests under the Income Tax Act, including the 90% Active Business Asset Test at the time of sale. If the company holds excess cash, passive investments, or other non-active assets, it may be disqualified. “Purification” refers to the process of removing or restructuring those disqualifying assets.
Failing to purify can cost clients hundreds of thousands in lost tax savings. Proper purification can preserve this valuable exemption—and elevate your role as a strategic advisor.
Key LCGE Qualification Criteria
To be eligible for the LCGE, a business must meet three main criteria:
Small Business Corporation (SBC) Status
At the time of sale, 90% or more of the fair market value of the corporation’s assets must be used in an active business carried on primarily in Canada.
CRA Guidance on SBC Status
Holding Period Test
The shares must have been held by the individual (or a related person) for at least 24 months before the sale.
Lifetime Capital Gains Exemption Holding Rules – CRA
Use of Corporate Assets
Throughout the 24-month period preceding the sale, more than 50% of the assets must have been used in an active business.
If any of these are at risk—especially the 90% active asset test—purification becomes essential.
Common Contaminants That Trigger Purification Needs
CPA advisors should regularly monitor for the following red flags:
Excessive retained earnings sitting as cash or marketable securities
Investment properties or other passive real estate holdings
Loans to shareholders or unrelated parties
Idle assets not used in business operations (e.g., surplus vehicles or equipment)
Cross-holdings in other non-active corporations
CPA Canada: Small Business Succession Planning Guide
Purification Strategies CPAs Can Lead
Purification is not a one-size-fits-all process. It must be tailored to the business structure and timeline. CPA-led strategies may include:
1. Paying Out Dividends or Bonuses
Distributing excess retained earnings via dividends or salaries reduces passive asset accumulation.
2. Spinning Off Passive Assets
Using a section 85 rollover or butterfly reorganization to transfer passive assets to a holding company or related entity.
CRA – Section 85 Rollover
3. Investing Idle Assets
Reallocating surplus cash into active business use (e.g., R&D, equipment, marketing) can reclassify their nature.
4. Settling Shareholder Loans
Clearing non-operating loans or restructuring them as part of an income-splitting plan.
5. Pre-Sale Planning Timeline
Begin purification at least 24–36 months before a potential sale. Some purification moves—like removing passive assets—may not cure prior contamination retroactively.
CPA Canada on Capital Gains Exemption Strategies
Integrating LCGE into a Broader Advisory Framework
LCGE planning intersects with multiple disciplines:
Corporate structuring
Family succession and estate planning
Shareholder agreements
Post-sale wealth management
Firms that adopt an Integrated Advisory approach can use LCGE purification as a gateway to deeper client engagement, especially with multigenerational family businesses.
WealthCo: Integrated Advisory Services
Conclusion: Make Purification a Practice, Not a Project
LCGE qualification is not a box to check at the time of sale—it’s a strategic discipline that CPA firms should build into their client service model. By identifying risks early and guiding clients through purification, you not only preserve tax savings but solidify your status as a trusted, proactive advisor.
