The Lifetime Capital Gains Exemption is one of the biggest tax breaks or incentives offered by the Canadian Revenue Agency (CRA), most people are not aware of it and it is seldom used. This tax break offers Canadians an exemption to paying tax on capital gains of up to$750,000 (was $500,000 until March 19, 2007) on the sale of qualified small business corporation shares, qualified farm property, and qualified fishing property. This blog post will focus on small business corporation shares, as this is the exemption most applicable to my clients.
These rules are applicable to many business owners running their own small business in Canada. Under this exemption if you sell the shares of a qualifying small business, you can do so completely tax free up to $750,000. Under the Canadian tax act, capital gains are already only 50% taxable, this exemption gives you a deduction equal to the other half.
These rules are quite complex and do not apply in all situations to all corporations; the following is a framework of the basic rules.
- The shares sold must be of a qualified small business corporation which at the time of disposition has 90% or more of its assets in an active business carried on in Canada, and over the last 24 months at least 50% of assets are involved in active business.
- The shares must only be owned by the individual, or a person or partnership related to the individual for the 24 months prior to the disposition of shares
These rules may seem like they are easy to comply with but the 10% non-active portion includes investments, stocks, bonds, or rental properties, and has to be closely monitored. Usually when individuals make use of this exemption they have planned it a few years in advance, it is not done on a whim.
This is a huge advantage to people who have sunk all of their own time, energy, and money into their own business and don’t have a pension. Individuals can use the value of their business as a nest egg to retire with. If maximized, using this exemption can save over $100,000 in taxes. There are however other complications such valuating the business, finding a buyer, ensuring you comply with the CRA rules, and knowing the right time to pull the trigger.
If you own a small business for which this exemption could apply I would recommend investigating it further. If you have any questions related to lifetime capital gains exemption and want to discuss it with a chartered please contact us at firstname.lastname@example.org , 604 510-0156, or visit our website at http://www.wattsca.ca for more information.
Disclaimer: The information in the blog is for general information only and is not intended to be a substitute for professional advice. Each person’s situation is unique, and a designated professional accountant can assist you in using the information on this blog to your best advantage. The author of this blog strives, but does not guarantee, to provide information which is current and accurate. Due to the nature of the information, it should not be relied upon for decision making without talking to a designated professional accountant. By obtaining information from this Blog, you fully release Steve Watts, Chartered Accountant of any liability that may arise from using this information.