Why Your Business Assets Matter Before a Sale: Lessons from the Tax Court
Why Your Business Assets Matter Before a Sale: Lessons from the Tax Court
If you’re planning to sell your business, one tax benefit often top of mind is the Lifetime Capital Gains Exemption (LCGE) — currently worth up to $1 million in tax-free gains when selling shares of a qualifying Canadian business.
But did you know the mix of your company’s assets could disqualify you from this exemption?
A recent Tax Court of Canada decision highlights why it’s important to review your asset structure well before a sale — especially if you’ve built up passive investments inside your corporation.
What Happened in the Case
In this case, a business owner sold shares of their company, expecting the sale to qualify for the LCGE. However, the CRA denied the exemption.
The reason? Too much of the company’s assets were considered passive or investment-related — not “active business assets” as required under the Income Tax Act.
The Tax Court sided with CRA, confirming that the company failed the “90% test” at the time of sale. This test requires that at least 90% of your company’s assets be used in an active business carried on primarily in Canada to qualify for LCGE.
Why the 90% Test Matters
Many business owners don’t realize that simply running an incorporated business isn’t enough. To qualify for the capital gains exemption, the business must meet specific asset-based tests at the time of sale — and sometimes during the preceding 24 months.
Common disqualifiers include:
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Large cash reserves not used in operations
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Corporate-owned stocks or real estate not used in business
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Holding excess capital in the company for investment purposes
The CRA examines your balance sheet, not just your income statement.
What Business Owners Should Do
If you’re thinking about selling your business in the next few years, here’s what we recommend:
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Review your balance sheet regularly, especially leading up to a sale
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Clean up excess cash or passive investments that could affect the 90% threshold
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Work with your accountant to conduct an LCGE eligibility review
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Consider a corporate restructuring if necessary, to “purify” the company
How Cloudiverse CPAs Can Help
At Cloudiverse CPAs, we support Canadian entrepreneurs with:
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Tax planning for business sales
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Corporate reorganizations
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Capital gains exemption reviews
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And proactive guidance for succession and estate planning
As expert tax advisors in Burnaby, our team helps ensure that when you’re ready to sell, your company structure is too.
Start Planning Early
The LCGE can save you hundreds of thousands of dollars in tax — but only if your company qualifies. Waiting until the sale is already underway may be too late to make the required changes.
If you’re considering a sale within the next 2–3 years, contact our team for a strategic LCGE eligibility review. Read more on Life Time Capital Gain Exemption : https://www.canada.ca/en/department-finance/news/2025/01/government-of-canada-announces-deferral-in-implementation-of-change-to-capital-gains-inclusion-rate.html
Contact us: aman@cloudiverse.ca
Website: www.cloudiverse.ca
Phone: 604 200 4027
Disclaimer
This blog is for general informational purposes only and does not constitute legal or tax advice. Please consult a professional accountant or tax advisor before making decisions.