If you plan to sell the shares of your business in the near future, don’t forget to take advantage of the lifetime capital gains exemption — it could save you and your family members up to $200,000 in tax each, depending on your province and when the shares are sold. That’s because every individual is entitled to a lifetime “capital gains exemption” up to $813,600 (in 2015), which can apply to the sale of qualifying private company shares (and farm and fishing property). While your exemption is limited to your total gains on qualifying property over your lifetime, you can carry forward any unused amount. However, proper planning is needed if you intend to take full advantage of the capital gains exemption.
Before you can attain this substantial tax savings, you’ll have to ensure the shares are considered “qualified small business corporation shares.” Generally, this means that, at the time of the sale, substantially all (i.e., 90 per cent or more of the value) of the business’s assets must be used for carrying on an active business in Canada, or the assets must be shares or debt in other qualifying small business corporations. Another requirement is that you, or a person “related” to you, must have owned the shares for two years before selling them and, throughout that period, more than 50 per cent of the business’s assets must have been used principally in an active business carried on in Canada or invested in other small business corporations (or any combination of these two).
This is where advance planning becomes important. If you’re thinking about selling your company, you should remove any assets, such as investments that aren’t used in its active business, to ensure you can claim the exemption in two years’ time. You may also want to regularly withdraw any excess cash and assets from your business.
You can also “crystallize” the
capital gains exemption in certain situations so you don’t have to
keep checking whether your company meets the qualified small business
corporation requirements. Where your company’s shares and
shareholders currently qualify for the exemption, you could trigger a
capital gain on your shares to permanently increase the adjusted cost
base of the shares, while continuing to own (or at least control) the
corporation.
One way you can crystallize the exemption is to sell shares to a family member or exchange existing shares for a new class of shares; your tax advisor can help you do this properly. If you already crystallized a few years ago when the exemption was lower, you should also consider triggering another gain — that way you can make full use of the $813,600 exemption for 2015.
Something else to keep in mind is that
if you have claimed interest expenses on your investments in excess
of your investment income in previous years, your ability to claim
the exemption may be impaired under the cumulative net investment
loss (CNIL). In addition, you may benefit from a special election for
qualified small business corporations that go public to take
advantage of the exemption without having to actually sell shares.
Otherwise, the shares will no longer qualify for the
exemption.
These are just a few
of the considerations when planning to take advantage of the capital
gains exemption. As long as you take important steps to ensure your
company’s shares will qualify, this exemption can be a valuable
strategy for keeping your tax bill low when you sell your
business.
