There are very few ways to earn a tax-free profit in Canada. One way is to take advantage of the lifetime capital gains exemption (the Lifetime Exemption) on the sale of shares of Canadian private corporations.

Many corporations in Canada are not listed on any stock exchange, but they still raise capital by issuing shares to investors. As long as the corporation carries on an active business in Canada and uses substantially all of its assets in that business, its shares will qualify for the Lifetime Exemption. To be eligible to use the Lifetime Exemption, the investor must be an individual resident in Canada and must have owned qualifying shares for at least twenty-four months prior to selling them.

When the shares are sold, the investor will be able to deduct up to $375,000 from the taxable capital gain realized on the sale. Because only 50% of a capital gain is taxable, the exemption effectively provides up to $750,000 of exempt capital gain.

As the name implies, once you’ve reached the $750,000 lifetime limit, you can’t use the exemption again. However, you don’t have to use it all at once: you can claim the $750,000 on several separate qualifying share sales over your lifetime.

As with all government programs of this nature, there are catches. Two of the main tax considerations that may affect the Lifetime Exemption are alternative minimum tax (AMT) and cumulative net investment loss (CNIL).

AMT can apply where a taxpayer claims too many tax preferences in a given year. It forces the taxpayer to pay some tax even though the taxpayer may have enough deductions, like the Lifetime Exemption, to eliminate tax for the year. Fortunately, AMT can be recovered in subsequent years, when fewer tax preferences are used.

CNIL arises where a taxpayer has accumulated investment losses. The taxpayer must first use up those losses before accessing the Lifetime Exemption. Taxpayers making investments that generate tax deductions will need to watch out for CNIL.

In summary, the Lifetime Exemption presents an excellent opportunity to earn a profit of up to $750,000 and pay no tax, but be careful to read the fine print.