Blogs & Comment

$750,000 capital-gains exemption

In my column on the tax advantages of self employment, reference was made to the $750,000 capital-gains exemption that could be claimed on the disposition of shares in a Canadian-controlled private corporation. There are a few complications to consider, perhaps with the help of a tax adviser, when claiming this credit:
If more than 10% of the assets in a business are passive (earning investment income) during the 12 months prior to the sale of shares, the exemption cannot be claimed; if passive assets are more than 50% of the total in the second year prior to the sale, the exemption cannot be claimed either.
Even if you do not expect to sell the corporation within 24 months, it is recommended to periodically purify your corporation and keep passive assets under 10% of the total by some method such as paying out dividends to a trust. That way, if a shareholder dies or needs to sell for unplanned reasons, the sale will more likely qualify for the exemption.
The exemption is available to each shareholder of the corporation, so a family can claim more than $750,000 if the spouse and children own shares. One way to set this up is to make the spouse and children beneficiaries of a trust that is a shareholder of the company (and controllable by the business owner and/or spouse). In this way use of the exemption can be multiplied but voting control is not given up to children or other parties.
No exemption is allowed in the sale of the assets of the business, as opposed to the shares. In many cases, buyers want to purchase the assets instead of the shares, as they do not want to inherit the liabilities of the company. But structuring a corporation so that it qualifies for the exemption improves ones bargaining position when negotiating the sale of the assets.
Sources: Books by E. Jacks and C. Van Cauwenberghe, mentioned in the column referenced above. Be sure to consult your own tax adviser.