Under the income tax system when assets are sold the taxpayer must pay tax on the appreciation of the assets. This appreciation is often referred to as capital gains. Note that a property does not have to be actually disposed of for it to be considered ‘sold’ under the income tax system. For example at death, a taxpayer is deemed to have ‘sold’ all their assets for income tax purposes at a fair value. To shelter some of these harsh tax consequences the income tax system provides an individual with the lifetime capital gain exemption (“LCGE”) on capital gains realized on the sale of qualified assets.

Assets that qualify for the LCGE are qualified small business corporation shares, qualified farms and qualified fishing property. For the purpose of this blog, we will focus on the Qualified Small Business Corporation shares (“QSBC”).

In the 2013 Federal budget the government has proposed to increase the lifetime capital gain exemption (“LCGE”) from $750,000 to $800,000 for gains realized in 2014. In addition the LCGE will be indexed to the Consumer Price Index for the 2015 and subsequent years. This proposal was enacted on November 5, 2013.

The first step in determining whether the shares owned qualify under QSBC rules is to determine whether the corporation is a small business corporation (“SBC”) on the day the shares are disposed of (“selling date”). To be a SBC the corporation must be:

  • a Canadian Controlled Private Corporation (“CCPC”). A CCPC is a corporation controlled by a Canadian resident individual or Canadian Non-public Corporation.
  • Have 90% of its assets attributable to either:
  1. An active business carried on in Canada by the corporation or a corporation related to it, or
  2. Shares of the capital stock or indebtedness of a subsidiary which is a SBC date.

The second step is determining who owned the shares of the corporation. In order to qualify as QSBC the shares must have been owned by the individual selling them or a person or partnership related the individual selling them for two years preceding the selling date.

The third and final step is twofold. For the two years preceding the selling date, the corporation must be a CCPC and 50% of the fair market value of the corporate assets must be attributable to either:

  • An active business carried on in Canada By the corporation or a related corporation
  • Shares of the capital stock or indebtedness of a subsidiary which is a SBC

In order to take advantages of the LCGE, one must ensure that the shares of the corporation meet the stringent QSBC criteria. Note that the QSBC criteria is over a two year period, and since a selling date may be unpredictable, one should try to keep the shares of the corporation as QSBS shares at all times.

 
For more information contact:

Shawna Bratin, MTax, CPA, CA
Tax Specialist
Tél: 514-842-3911 extension 278

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