Yesterday I was visiting my parents back home on the farm and enjoying a lazy Saturday afternoon away from the big city. In exchange for some really great ice cream, my Mom asked me for some tax advice related to the lifetime $500,000 capital gains exemption.
Long story short, she was under the impression she could shield any and all capital gains using the exemption. Unfortunately, the exemption is very specifically targeted and is not a blanket exemption for just any gain.
So, a rundown of the basic facts surrounding this oft-misunderstood tax tidbit.
- Share sales qualify for the exemption if and only if they are of a Small Business Corporation, which is defined in the Tax Act as being a Canadian-Controlled Private Corporation with generally 90% of its assets involved in active business.
- The shares must have been owned by you or a relative for a 24-month period prior to the sale, and for that same period at least 50% of the assets must have been used in active business in Canada.
- Steps should be taken to “purify” the corporation to take advantage of the exemption. This normally means removing investments held by the corporation, as these are assets not used in its active business and could thus violate the 50% and 90% rules above.
- The 2007 budget proposed increasing the lifetime exemption from $500,000 to $750,000, and proposes to take effect for dispositions after March 18, 2007.
- Unincorporated businesses — sole proprietorships or partnerships — are not eligible to use the exemption, which is a prime benefit to incorporation. There are ways to roll business assets into a newly formed corporation not resulting in tax.
- You can “crystallize” the exemption at a time when the corporation qualifies, which involves transferring the shares to a holding corporation and electing to recognize a gain. In case the government decides to eliminate or change the exemption, you’ve already taken advantage and are protected.
As with any general tax information, your situation will be unique. You should definitely seek out a Chartered Accountant to review your personal situation and prepare a plan tailored to you. If you need a CA, please contact me and I can provide some recommendations!