How to sell your business and minimize the capital gains tax

Most owners assume the price decides the tax. It matters less than the buyer. Three people can pay you exactly the same $5 million for exactly the same shares — a competitor, your daughter’s holding company and a trust for your employees — and your tax bill can range from nothing to more than $2.3 million depending on which of them signs.

That range comes from three provisions in the Income Tax Act, each built for a different buyer, and each with its own price in control and timing.

What capital gains tax will I pay when I sell my business?

Start with the base case. When you sell shares of your corporation, the profit over what you paid for them is a capital gain, and half of it is included in your income. The proposal to raise that inclusion rate to two-thirds was cancelled in March 2025, so the rate is still 50%. At Ontario’s top marginal rate of 53.53%, that works out to roughly 26.8% tax on every dollar of gain.

On a $5 million gain with no exemption, that is about $1.34 million.

Two things have to be true before any of the exemptions can help. You have to sell shares, not have the corporation sell its assets — an asset sale is taxed inside the company and taxed again when the money comes out to you, and none of these exemptions applies to the corporate gain. (The trade-offs are in share sale vs. asset sale.) And the shares usually have to be qualified small business corporation (QSBC) shares: a Canadian-controlled private corporation with at least 90% of its assets, by value, used in an active business in Canada at the time of sale, more than 50% throughout the previous 24 months, and shares that nobody outside your family has owned during those 24 months.

Retained cash and investment portfolios are what usually fail the test. A company that has parked three years of profit in a brokerage account may be 60% active and 40% passive — and the exemption is gone until the excess is moved out. The fix is called purification, and if it is needed to meet the 50% test, it starts a fresh 24-month clock.

Option 1: the lifetime capital gains exemption (any buyer)

The lifetime capital gains exemption (LCGE) shelters gains on QSBC shares up to a lifetime limit per individual. The limit rose to $1.25 million for sales after June 24, 2024, and indexation to inflation resumed in 2026, putting this year’s figure at roughly $1.275 million. The CRA reports the deduction at line 25400 of the T1 return.

On the $5 million example, the exemption removes about $1.275 million of gain, and the tax falls from roughly $1.34 million to roughly $997,000 — a saving of about $340,000. It works with any arm’s-length buyer, and you can walk away on closing day.

The limit is per person, which is why owners who plan early do better. If your spouse and adult children hold shares directly or through a family trust, each of them may have an exemption of their own — four exemptions is roughly $5.1 million of sheltered gain. That structure has to be in place, and the shares have to have been held, for 24 months before the sale. Multiplying the capital gains exemption with a family trust sets out how it works and where the CRA pushes back.

The exemption is not free of alternative minimum tax. Since 2024, 30% of the exempt gain is added back in the AMT calculation, and on a large sale AMT can exceed your regular tax for that year. AMT is recoverable against regular tax over the following seven years, which helps if you keep earning income and helps much less if you retire.

Option 2: selling to your children (the intergenerational transfer rules)

Sell your shares to an arm’s-length buyer’s holding company and you get a capital gain. Until 2021, sell the same shares to your son’s holding company and section 84.1 of the Income Tax Act recharacterised the whole price above your paid-up capital as a dividend. You could not use your exemption, and at Ontario’s top rate for non-eligible dividends of 47.74%, the $5 million sale cost about $2.39 million in tax instead of roughly $997,000. Selling to a stranger was cheaper than selling to your own family.

Bill C-208 tried to fix that in 2021 with conditions loose enough that the parent could keep running the company. Parliament replaced it with the intergenerational business transfer rules, which apply to sales on or after January 1, 2024. A genuine sale to a corporation controlled by your children — which includes grandchildren, nieces and nephews — is again taxed as a capital gain, so the lifetime exemption and a capital gains reserve of up to 10 years are available.

The condition that actually does the work is that you leave. There are two paths:

• Immediate transfer (3 years). On closing you give up legal and factual control and keep less than 50% of any class of shares other than non-voting preferred shares. For 36 months a child must control the company and be actively involved in the business on a regular, continuous and substantial basis, and by the end of that period you must have taken reasonable steps to hand over management and stop running it permanently.
• Gradual transfer (5 to 10 years). You give up legal control on closing but can stay involved longer. Within 10 years your economic interest — debt and equity combined — must fall to 30% or less of the company’s value at the time of sale, and the child-control and management tests run for five years.

You and the purchaser make a joint election, you share liability for the tax if the conditions later fail, and the CRA has an extended period to reassess — three extra years on the immediate path, ten on the gradual one. The rules are strict — probably stricter than most families expect — and they are tested against what actually happens after closing, not against the share purchase agreement. What the parent gives up under the intergenerational transfer rules goes through each condition.

Option 3: selling to an employee ownership trust (the $10 million exemption)

An employee ownership trust (EOT) is a trust that buys a controlling interest in your company and holds it for the benefit of your employees. Since January 1, 2024, the first $10 million of capital gains on a qualifying sale to an EOT — or to a worker co-operative — has been exempt from tax. The exemption was originally limited to sales before the end of 2026. The Spring Economic Update in April 2026 proposed making it permanent, and Bill C-30 did so when it received royal assent on June 19, 2026 (Finance Canada’s announcement).

On the $5 million example, the gain is fully covered and there is no regular tax on it. That is a different order of saving from the lifetime exemption, and the conditions are correspondingly specific:

• for the 24 months before the sale, the shares were owned only by you, a related person or a partnership you belong to, and more than 50% of the company’s assets were used principally in an active business;
• you, or your spouse, were actively engaged in the business on a regular and continuous basis for at least 24 months at some point before the sale;
• the trust acquires control, and after the sale former owners can make up no more than 40% of the company’s directors or the trust’s trustees;
• where several owners sell together, the $10 million is shared among them, by agreement.

The same 30% AMT add-back applies. If, within 36 months, the trust loses its EOT status or the business stops meeting the active-asset test for two consecutive years, the exemption is denied to you retroactively. Professional corporations cannot use it.

The cost is in the structure of the payment. An EOT rarely has $5 million on closing; it pays you mostly out of the company’s future profits over several years, which is why the rules allow a 10-year capital gains reserve and a 15-year window to repay loans from the company to the trust. You are a creditor of the business you used to own, managed by people who used to report to you, with no control over either. Seller protections in an EOT sale covers what to build into the documents, and how EOTs work covers the trust itself.

How the three exemptions compare

Figures are illustrative: a single individual, nominal cost base, Ontario’s top 2026 rates, no AMT, no other income. Your numbers depend on your province, your cost base, your other income and how the price is paid.

Which route should you choose?

On tax alone the EOT wins, and for a profitable company with a capable second line of management it can be the right answer. It is the wrong answer if you need the money on closing, if the business only works because you are in the room, or if the company cannot carry several years of payments to you while still investing in itself. A smaller exemption with cash on closing can be worth more than a larger one paid out of profits that may not arrive.

The family route makes sense when a child is already running the business and you are ready to stop. If you intend to stay on as the person who really decides things, the rules are built to catch that, and the deemed dividend that follows costs far more than the exemption would actually have saved.

The lifetime exemption is the default for any third-party sale, and it is the one most often lost to something avoidable — a cash balance that fails the 90% test, or shares issued to a new holding company 18 months before closing.

What to do 24 months before you sell

• Test the shares now. Have your accountant run the 90% and 50% asset tests on the current balance sheet. If purification is needed, it should happen before the 24-month clock matters.
• Decide who holds the shares. Family members who are going to claim their own exemptions need to own shares, directly or through a trust, for 24 months. An estate freeze is the usual way in.
• Pick the buyer type before you pick the buyer. The EOT and family routes each have their own 24-month and post-closing tests, and they shape the share structure, the board and the payment terms.
• Model the payment, not just the price. A reserve spreads the tax, and AMT can still land in year one. Run the after-tax cash in each year of the payout.
• Sell shares. If the buyer insists on assets, price the second layer of tax into the deal.

The tax implications of selling a business in Canada covers earn-outs, non-competes and price allocation, and the selling a business page sets out how I act on a sale. The exemptions are generous, and every one of them is decided by facts that were fixed two years before the buyer called.